Private foundations and other nonprofit organizations often suggest supporters donate stock rather than cash. This provides a source of income for the receiving organization as well as a tax deduction for the giver. In addition, planned stock donations can reduce capital gains tax. It is important to be aware of the rules surrounding stock donations as well as proper procedure for the transfer of ownership to ensure that your gift is truly beneficial to all parties.

Benefit to the Receiving Organization
Strictly speaking, a donation of stock is no better or worse than cash for a receiving organization. The gift of stock does have extra tax benefits for the donor, however, which may lead to an increased incentive to give and to give generously.

Benefits for Donors
Stock donations benefit the giver in two ways. First, the giver may deduct the fair market value of the stock from the tax return for that year as a charitable donation. Second, by donating the stock the giver avoids any long-term capital gains tax that would normally be associated with the sale of the property.

Managing Capital Gains and Losses
If you have a stock you have held for more than one year and it has increased in value, you have an unrealized long term capital gain. If you sell this stock, the amount of the gain (the difference between the sale proceeds and your original cost) will be taxed as a capital gain.

When you donate shares of stock to a foundation, you do not sell them and do not realize the capital gain, so you do not pay the additional tax.

If you have stock with a long term loss (it is worth less than you paid for it), the situation is somewhat different. Sale of stock at a loss lowers your overall capital gain (the amount of any loss is subtracted from any gain for taxable income purposes). In these situations, you are better off to sell the stock and donate the proceeds to the foundation, rather than donating the stock itself.

Procedures
Transferring stock for donation purposes is relatively simple. Determine which stock to donate and how much you'd like to transfer. Contact the intended recipient to get instructions for delivery and any other required forms. Provide these delivery instructions to your broker. If your stock is in "book-entry" form (held electronically at your broker), your broker will ask for a signed letter or form that outlines your instructions prior to executing the delivery. If the stock is in certificate (paper) form, you will fill out a Stock Powers form. In either case, your broker will finalize the transfer and the foundation will issue a receipt as confirmation.

Warnings
Be aware that the IRS does not consider every foundation a qualified charitable entity. While you can still donate to non-qualified foundations, your contributions will not be tax deductible. In addition, tax deductible donations cannot include reciprocation agreements - donations made with the understanding that you as a donor will receive a benefit. IRS Publication 526 provides guidelines regarding qualified charitable organizations.

Also note that a contribution is considered complete when it is booked at the foundation. Stock transfers can take anywhere from a few days to a few weeks, so plan ahead when making donations at year end.