You probably heard donating appreciated stocks or mutual fund shares to a charity is more cost effective than donating cash. The charity gets the shares. You get a tax deduction for the full value (if you itemize) and you avoid paying capital gains tax.
You can also gift appreciated shares to a family member who are in 0% long term capital gains tax bracket. They can sell the shares tax free.
But how do you donate or gift shares, exactly?
If you are donating shares to a charity, ask the charity for their brokerage account information. They will give you a DTC number and an account number.
DTC is The Depository Trust Company. It’s the place where all the security ownership records are registered. DTC is part of the Federal Reserve system. Every brokerage firm or mutual fund company has a DTC number.
If you are gifting shares to a family member who has an account at a different brokerage firm, get the DTC number of that brokerage firm and your family member’s account number. If you and the recipient have accounts at the same company, you just need their account number.
With the DTC number and account number, you write a letter to your brokerage firm or mutual fund company telling them you want to donate or gift X numbers of shares from security Y to so-and-so at this DTC number and account number. If you use specific lot identification, include the lots too.
If you and the recipient have accounts with the same company, they will just transfer the shares internally. If not, your brokerage firm or mutual fund company will tell DTC to move the shares from one account at one company to another account at another company. It’s all done in computer records.
Ask the charity to give you a receipt for your tax records. What charity does with the shares is up to the charity. They can hold or they can sell.
If you gift shares to a family member, they get your original cost basis and purchase dates. If you have held the shares for more than one year, they can sell right away and still have the gain treated as a long term capital gain for them.
When I say family member, I’m using the term loosely. The recipient can be technically an unrelated person like a boyfriend or girlfriend, or a friend or neighbor, a teacher or mentor or whomever you want to give a gift to.
Please note I’m putting aside the gift tax. Any person can give any other person up to the gift tax exclusion limit without triggering a gift tax form. A married couple can give any one person double that without triggering gift tax. A couple can give another couple four times the exemption limit. Unless you are very rich, that’s a lot of gifts!