Fidelity points to a tax-saving way to sidestep capital gains

Holding a stock for years and then selling after a big run-up can leave investors owing the federal government as much as 23.8% of the gain, based on the top long-term capital gains rate plus the 3.8% Medicare surtax, according to Fidelity Charitable.

For investors who also want to give to charity, there is an alternative that may help reduce or eliminate that tax hit.

Fidelity’s year-end tax planning guide emphasizes donating appreciated shares directly to a qualified charity instead of selling them first.

That approach lets the donor avoid capital gains tax, while the charity receives the stock’s full market value.

Why the strategy can create two tax advantages

Fidelity Charitable and Kiplinger both note that the tactic can produce two benefits at once for long-term holders.

By giving the shares directly, the donor avoids tax on the increase in value. If the donor itemizes deductions, they may also claim a charitable deduction based on the stock’s fair market value at the time of the gift, said Craig Wear, founder and CEO of Q3 Advisor.

Wear said the larger the built-in gain, the more valuable the strategy becomes.

For example, a $100,000 position with an $80,000 gain would generate $19,040 in federal tax at the combined 23.8% rate, meaning a sale followed by a cash donation would leave the charity with less than a direct transfer would provide.

Donald Greene, National Donor-Advised Fund Executive at Bank of America Private Bank, said many investors overlook this benefit when planning year-end gifts.

Charitable gain harvesting is a valuable tool that allows you to maximize your resources, so that you can fully realize your charitable vision and legacy,

The strategy is not limited to individual stocks. Fidelity says it can also apply to bonds and mutual fund shares, as long as the donor has owned them for more than a year.

What deduction limits and rule changes mean

According to IRS Publication 526, gifts of long-term appreciated securities to a public charity are generally deductible only up to 30% of adjusted gross income, compared with 60% for cash donations.

Any unused amount above that limit can be carried forward for as long as five additional tax years, which gives donors some flexibility if a single gift exceeds the annual cap.

Q3 Advisors also said new rules affecting charitable deductions for itemizers have taken effect under the One Big Beautiful Bill Act.

One provision sets a 0.5% AGI floor, so only contributions above that level are deductible. Another limits itemized charitable deductions to 35% for taxpayers in the top 37% bracket.

Those changes can reduce the overall deduction for high-income donors, but the capital gains tax savings at the center of the strategy remain unchanged.

Why many investors still give cash instead of stock

A Fidelity study found that 80% of donors owned publicly traded securities that had risen in value, yet only 19% had ever given those assets to charity.

That reluctance has a cost: Kiplinger’s tax-smart giving guide says transferring stock directly can increase the amount a nonprofit receives by as much as 20% compared with selling the shares and donating cash.

For donors who want flexibility, a donor-advised fund can be another route. Q3 Advisors noted that a DAF can provide an immediate deduction while allowing the donor to recommend grants to several charities over time.

Fidelity also describes the method as a portfolio rebalancing tool, since giving away the most appreciated position can reduce concentration in a single stock without creating a taxable sale.

What the IRS requires for the transfer

To complete the gift, the donor must arrange a direct transfer of shares to the charity’s brokerage account, and the transaction must be completed by the end of the tax year to count for that year’s deduction, Fidelity said.

The IRS requires written acknowledgment from the charity for gifts valued at $250 or more, and donations above $500 require filing Form 8283.

Only long-term holdings qualify for the full fair market value deduction, so the shares must have been held for more than one year when given away.

What investors with concentrated positions should consider

People who own a large stake in a single stock must decide whether to donate the shares directly or sell them and give cash instead.

According to Anchin LLP, the best option depends on the gift amount, the donor’s adjusted gross income, expected AGI over the next five years, and whether the donor can itemize.

Although appreciated securities are subject to a 30% AGI deduction cap rather than the 60% limit for cash, Wear said in-kind gifts are usually more efficient because they avoid capital gains tax.

Fidelity recommends starting with the most appreciated shares, since they offer the biggest tax benefit and can help reduce portfolio concentration without triggering a tax bill.

Donors who choose the right asset, verify that the charity accepts stock transfers, and complete the gift before year-end have the key steps in place, according to Fidelity’s guidance.