Timing is critical when considering how to maximize your benefit from appreciated assets. Among your options, you may hold the investment hoping it will continue to appreciate or sell to capture your long-term capital gains, incurring a 15% capital gains tax. Depending on one’s overall objectives, there are several options:
You might find minimizing or avoiding gain attractive. When you contribute appreciated property held long-term, real estate or securities, you usually generate a deduction equal to the full fair-market value of the asset. In addition, you do not have to pay tax on any of the capital gain.
Susan owns stock worth $10,000 that she purchased four years ago for $2,000. If she sold the stock, she would realize a taxable gain of $8,000, which would generate capital gains tax of $1,200 (at the 15% rate).
After meeting with her advisors, she decides to make a gift to Hamilton. The gift will save her $2,800 in income tax (at the 28% tax bracket). By giving the stock directly to the College rather than selling it and donating the proceeds, Susan saves capital gains tax of $1,200.
You may have appreciated stock you would like to sell, but doing so would result in significant capital gains tax. You should consider contributing some stock to Hamilton and selling some in your account. By doing so, you will avoid capital gains tax on the contributed securities, and the income tax charitable contribution deduction generated by the gift helps to offset the tax due on the recognized capital gain.
If you believe that your stock still has solid growth potential, use it to fund your charitable gift and then use your income tax savings to purchase new shares of the same stock. This strategy re-establishes your position in the stock and increases your basis in the investment to the current fair-market value.
If some of your stock has decreased in value, you may want to sell some shares, generating a deductible loss. A capital loss can offset any amount of capital gain and up to $3,000 of ordinary income each year.