Charitable Gain Harvesting: Why the Best Asset to Give May Be One You Want to Keep

Most conversations about donating appreciated securities start with the obvious case. A donor owns a stock or fund that has appreciated substantially, the position has become too large, and the donor wants to trim it anyway. Rather than sell the shares, realize the gain, and then give cash to charity, the donor contributes the appreciated shares directly. A qualifying tax-exempt charity generally can sell the donated shares without recognizing the capital gain the donor would have realized on a personal sale, subject to applicable tax rules and the donor’s circumstances.

That is good planning. But it is also where the conversation often stops. The more interesting opportunity is much more counterintuitive: an asset worth considering for the gift may be one the donor has absolutely no desire to sell.

The Counterintuitive Opportunity

Suppose a donor already plans to make a meaningful cash gift. Before writing the check, the donor and professional advisors can look across the taxable portfolio and ask a different question: Which long-term appreciated holdings have the largest unrealized gains relative to their cost basis?

That question should not be answered on taxes alone. Investment fundamentals, diversification, concentration, liquidity, charitable intent, and the donor’s overall financial plan still come first. But once those considerations are addressed, a highly appreciated stock, mutual fund, or ETF that the donor wants to keep may be a strong candidate for the charitable gift.

If appropriate for the donor, appreciated shares can be contributed to charity and the cash already earmarked for the gift can be used to repurchase the same investment. The donor can preserve the desired market exposure while replacing donated low-basis shares with newly purchased shares at the then-current purchase price. That is the essence of charitable gain harvesting.

A Strategy I Have Been Using and Writing About for Years

I first wrote about charitable gain harvesting in 2010, when the maximum federal long-term capital-gains rate was generally 15%. Even then, the objective was not simply to avoid tax on a sale. It was to connect charitable intent with tax-aware portfolio management by contributing highly appreciated shares while allowing the donor to maintain desired investment exposure when appropriate.

The Wall Street Journal later described an implementation of the strategy in Kelly Kearsley’s June 6, 2013 article, “Harvesting Capital Gains for Charitable Donations.” The article described a couple who had historically given at least $60,000 a year to their favorite charity by writing a check. They also owned highly appreciated mutual funds that were intended to remain in their managed portfolio. That was precisely what made the case interesting.

The couple contributed $100,000 of appreciated fund shares and, the same day, used $100,000 of cash they otherwise would have given to charity to repurchase the same funds. As I told the Journal, “The client continues to have the same underlying holding.” The following year, the couple used the strategy again, this time contributing $150,000 of appreciated shares. The example is historical and is included to illustrate the mechanics, not to suggest that another donor will experience the same tax or investment outcome.

How It Works, One Example

For illustration, assume a donor plans to give $100,000 to a favorite qualifying charity and also owns $100,000 of a long-term appreciated investment originally purchased for $40,000. The position contains a $60,000 unrealized gain, but the donor likes the investment and wants to continue owning it.

The conventional approach is to write a $100,000 check and leave the investment alone. The charity receives $100,000, but the donor is still holding the same $60,000 embedded gain.

With charitable gain harvesting, the donor instead contributes $100,000 of the appreciated investment. Assuming the gift and recipient satisfy the applicable tax requirements, the charity generally can sell the shares without recognizing the capital gain the donor would have realized. The donor then uses the same $100,000 of cash that had been earmarked for the gift to repurchase the investment.

If market prices remain approximately unchanged, the charity still receives roughly $100,000 of value and the donor again owns roughly $100,000 of the investment. The newly purchased shares have a cost basis based on the repurchase price, rather than the $40,000 basis carried by the donated shares. In that sense, the old $60,000 embedded gain in the donated shares is no longer sitting in the donor’s taxable portfolio. Actual results can differ because of market movement, transaction timing, fees, tax rules, and the donor’s individual circumstances.

Important Considerations

The tax treatment depends on the donor, the asset, the type of charity, the holding period, and applicable deduction limits. Not every charity accepts securities, and market values can change between the transfer and repurchase. A donor should also avoid letting tax considerations override investment suitability, diversification, liquidity, or other financial objectives. The investment advisor and tax professional should coordinate the transaction before it is implemented.

Looking at the Portfolio Differently

Tax-loss harvesting has trained investors to look for losses that can be used productively. Charitable gain harvesting asks us to look just as intentionally at appreciated positions. After first addressing the donor’s investment and financial-planning needs, it may make sense to review long-term appreciated holdings by unrealized gain relative to cost basis and consider whether some of those shares are appropriate candidates to fund a charitable gift that was already going to be made.

The question is not simply, “What do we want to sell?” It is also, “What asset can fund this gift efficiently without compromising the portfolio?” Sometimes the answer is a concentrated position the donor already wants to reduce. Sometimes it is an investment the donor intends to continue owning.

Who Should Raise the Idea?

The opportunity can surface in several places. An investment advisor may see it while reviewing cost basis and unrealized gains. A CPA may identify it while discussing charitable deductions or tax planning. A planned giving officer may hear that a donor is preparing to make a large cash gift and ask whether appreciated securities have been discussed with the donor’s investment advisor or CPA.

A planned giving professional does not need to recommend which securities should be transferred. The value may simply be in asking the question before the cash gift is made and directing the donor back to the appropriate advisors. If the donor’s advisors determine that the strategy is expected to reduce the donor’s tax cost, the donor may also choose to consider whether some of that benefit should support a larger charitable gift.

The Takeaway

Most people understand the idea of donating appreciated securities they already want to sell. The broader opportunity is to look beyond those positions. If a donor is already planning a charitable gift, highly appreciated holdings elsewhere in the taxable portfolio may be worth considering, including investments the donor intends to continue owning.

In the right circumstances, appreciated shares can fund the charitable gift and the donor can use the cash that otherwise would have been donated to repurchase the investment. The strategy may preserve the desired market exposure while replacing donated low-basis shares with newly purchased shares at a higher current basis. Sometimes the asset worth considering for a charitable gift is one the donor plans to own right back.