If you are charitably inclined,
Don’t like paying taxes,
And have made sound investments,
Then this blog post is for you.
A common selling point in the world of money management, is the ability to “tax loss harvest” for clients. If you’re unfamiliar with this strategy, the TLDR is that when your investments lose money, you can write off those investment losses against both earned and investment income. In practice this involves the selling and repurchase of “like” ETF’s while avoiding “wash trading” rules (more on this in another post).
A less commonly discussed (or solicited) strategy is the ability to “harvest” capital gains for clients.
In today’s version of the tax code, you can gift investments to a qualified charity of your choice, and fully deduct the fair market value of those investments up to 30% of your AGI.
Said differently, if you make $200,000 per year you can get up to a $60,000 tax “write off” by giving away investments that have made money.
The benefit in this strategy, is that when you gift appreciated assets not only do you avoid paying capital gains tax (which can get as high as 23.8%), you’re also positioning yourself to make larger charitable contributions than if you had just used cash.
For example
I buy 1000 shares of Apple for $25 in 2014.
Today those shares are worth $177,000.
That means, I have $152,000 in unrealized capital gains.
If am looking to sell those investments to rebalance (or diversify) my portfolio, I would (likely) owe $23,000 in taxes.
So alternatively, I decide to gift those stocks to my church and get a tax deduction of $177,000 that I’m able to “carry forward” for the next 5 years.
Meaning,
If in year 1 my AGI is $200,000, and I can only “write off” $60,000 of my income via charitable gifting – then in subsequent years I can still use the remaining $117,000 (of the original $177,000) as a tax “write off.”
I can continue to do this until I use my original balance of $177,000, or 5 years have passed.
Year 1 - $60,000 deduction
Year 2 - $60,000 deduction
Year 3 - $57,000 deduction
Year 4 – do it again??
Portfolio is rebalanced,
Church gets money,
And I paid less in taxes.
All wins.
A few caveats
This strategy works best on investments with long term capital gains (you’ve held the asset for more than a year).
If you have short term capital gains, then you will only be able to deduct your cost basis in the investment (the money you put in) and not the full market value of the asset (what your investment is worth today).
Although in some cases it may make sense to donate your cost basis… especially if gains are minimal.
Also, you can use this strategy with any investment (not just stocks) – although rules will vary based on asset type (real estate, property, collectibles etc).
Cheers,