Many people make charitable donations to support causes that are important to them, but people tend to donate cash when they give. However, it’s possible to donate stock instead of cash. Donating stock can have tax advantages for you, while also allowing your charity to receive more.

But despite its advantages, not everyone knows how donating stock to charity works or even, in fact, that it’s an option. Here are some of the advantages of donating stock and how it works.

How charitable donations of stock work

People often only think about donating cash to charity, but charities can also accept donations in other forms. Cash, stock, cars — all of these have value — and charities are usually happy to accept them. With stock, the process can be as simple as transferring shares from one brokerage account to another, and you can go this route each year, if you want.

However, you have another way to donate stock, particularly if you want to give over time. For example, a donor-advised fund allows you to contribute a bunch of stock at one time and then disburse the gift over time. You can get a tax deduction for the full amount in the year you make the initial donation, but you don’t have to disburse the full amount immediately. Instead, you let the fund know how and when you want to make charitable gifts.

The donor-advised route can make sense if your primary goal is to max out your tax deductions in any single year. But you must itemize your deductions in order to claim charitable gifts, so this strategy can help put your contributions over the standard deduction amount.

Tax benefits of donating stock

Giving stock to charity helps avoid the sting of taxes in the whole donation process.

When you donate stock to charity, it’s possible for both you and the charity to avoid any capital gains on the stock. Normally, if you sell stock held in a brokerage account, you would be taxed on any appreciation in that stock. If you held it for a year or longer, you would have to pay the long-term capital gains tax rate of up to 20 percent. If you held it for less than a year, the gains are taxed as ordinary income, which can mean a rate as high as 37 percent in 2023.

Generally, the tax advantages of donations are greater for the very wealthy, as a large portion of their income could otherwise be subject to the 37 percent rate. Those with more modest incomes can still benefit from tax donations, though the benefit may not be as significant.

Donating stock is especially beneficial when a stock has appreciated. You can claim a deduction for the value of the stock, legally avoiding tax, and the charity gets the full benefit of the stock. In any given year, you can deduct up to 30 percent of your adjusted gross income from donations. Any excess contributions can be carried forward on your tax return for up to five years.

Stock donations are also good for charities because they can avoid expensive tax bills. If the charity is a tax-exempt non-profit, it will usually not have to pay any taxes on the donated stock. That is true even if the charity sells the shares for cash, due to its tax-exempt status.

How to donate stock to charity

The first step when donating stock is to check whether the charity you are considering can accept stock donations. Some have that information on their website. If not, contact the charity and ask if they accept donations of stock. You may also need information like the charity’s brokerage account number and mailing address, so ask for this upfront.

If it does accept stock donations, let your broker know you’d like to donate your stock to charity. Once you give them the charity’s information, the broker will be able to initiate the stock transfer.

One thing to keep in mind is that you might encounter issues if you are donating at the end of the year. At this time brokerages are often overwhelmed with requests. If you initiate the stock transfer at the end of the year, it may not be completed before Dec. 31, and if so, you won’t be able to count it for the current year of taxes. So start the transfer well in advance.

When you shouldn’t donate stock to charity

While donating to charity is laudable, sometimes it doesn’t make sense to do so in stock.

One scenario is when the price of a stock you want to donate has declined since you bought it. Instead, you can sell the stock and take a write-off for your loss on your taxes, a process called tax-loss harvesting. Then, if you want, you can donate the proceeds from that transaction.

Given the extra hassle of transferring stock and the cost of doing so, it may not make sense to donate stock if you only want to donate a small amount. As mentioned before, you can only claim a tax deduction for stock gifts if you itemize deductions on your tax return. If you are making a one-off donation, it may not exceed the standard deduction amount. So donating stock works best when it’s a sizable one-off contribution or a series of substantial amounts.

Also remember that the charity must be able to accept stock donations. If it can’t, it would be better to donate cash. In reality, most charities will just convert the stock to cash anyway to help fund their operations. So it’s also best to donate stock that has some degree of liquidity.

Bottom line

Donating stock to charity has advantages for both the donor and the recipient. The donor can claim the full donation as a tax deduction, while the charity may not have to pay taxes if it’s tax-exempt. Many charities accept stock donations, but check with the one you’re considering.