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!
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KD says
What about gifting shares to a friend? Do the rules of gifting to a family member still apply?
Harry Sit says
@KD – Yes. See IRS Publication 17, which says:
“Property received as a gift. If you receive a gift of property and your basis is determined by the donor’s adjusted basis, your holding period is considered to have started on the same day the donor’s holding period started.”
It doesn’t matter if the recipient is a family member or friend.
nickel says
Any idea what (if any) impact AMT has on the tax treatment of donations of appreciated shares? This just popped up on the Bogleheads forum and I’m not sure of the answer. Do you still get to deduct the full value of the donated shares?
Harry Sit says
@nickel – Yes, you are still able to deduct the full value of the appreciated shares donated to charity. Charity donations and mortgage interest are the two (major) deductions still allowed under AMT. Most other deductions such as state income tax and property tax are not allowed AMT.
William says
Can I give appreciated stocks to my parents overseas? Since they are non resident aliens, they don’t have to pay any capital gain tax. So if my wife and I give them below the gift tax limit, we don’t have to pay any US taxes?
v hari says
myself and my wife hold some company shares jointly which have not yet been demated. now if my wife gifts her holding to me in addition to gift deed should we submit any other document to the company for transfer of shares by one joint holder in favour of the other? the co. is asking for a share transmission form but I feel this form is applicable only if a joint holder is dead and not for gifts.