A lot of people reading this tend to donate frequently, especially recurring donations to places like churches. I’m betting almost all of you do it with cash.
I’m also assuming most people reading this are taking a portion of their earnings and habitually investing it into some kind of long-term savings asset like an index funds.
If you are someone who (1) regularly donates money, and (2) dollar cost-averages into stock or Bitcoin, you need to be donating the asset instead of cash.
There are both selfish and selfless reasons to do this:
- The charity gets more
- You can write more off on your taxes
- You raise your cost basis
Charity Gets More, and Reduced Capital Gains Taxes
When you sell an asset for a gain, you incur capital gains taxes based on whatever the gain was.
If you sell before you donate, this happens:
- Buy $1000 of a stock, it goes to $5000
- You sell for a $4000 gain
- Capital gains taxes on that gain of 15%, so you keep $3400.00
- Donate $3400 to charity, you get $3400 of tax write offs
If you donate the appreciated stock directly:
- Buy $1000 of a stock, it goes to $5000
- $4000 gain
- You give $4000 of the stock itself to the charity, and they sell it for zero capital gains (since they’re a charity they can do that)
- You keep $1000 of your asset, and write off $4000 on your taxes
There are other little tax optimizations that can happen too, but the short version is you are better off sending an asset instead of proceeds from that asset, and the charity gets more themselves
Raise Your Cost Basis
Raising your cost basis is good.
If you bought something at $1000, and sold it for $5000, your cost basis is $1000. You would be taxed on $4000 of gains.
If you were able to (legally) say you bought it for $4999 and sold for $5000, your taxable gains would be $1.
You can’t lie about your cost basis, but you completely legitimately raise your overall cost basis over time when you dollar-cost average into it. You can also speed up this process when an asset that has appreciated since you bought it.
This works with two conditions:
- You are still actively buying that asset (i.e. it’s what you dollar-cost average into)
- It costs more to buy now than what your cost basis currently is
In essence, this doesn’t work if you bought an asset for $5000 and it’s worth $1000 now. But if you did, you wouldn’t sell it for any tax advantage anyway since it’s just a loss (unless you’re trying to do tax-loss harvesting).
A Quick Example
You bought 20 of a stock at $500 each. It goes to $1000. You want to donate one while buying another.
- You donate one share, get $1000 in write-offs (note in this example you’re donating the whole share, not just the proportion of it that’s equivalent to the gains)
- You buy a new share at $1000
Outcome:
- Donation and tax deduction of $1000
- You spent $1000
- You still have 20 shares
- Your previous cost basis for all 10 shares was $500, and your new cost basis is $525
If you had not donated and only added one more share to your pile, your cost basis would be $523.80.
Note that you are still “losing” money on this deal. This is not a strategy to get more money. This is a strategy to give away less in taxes for those who already having a habit of both investing and giving.
Donating assets to optimize taxes only works if you were already going to both donate AND keep buying that same asset.
Despite these caveats, this still applies to almost all charitable investors.
If I did the math wrong or overlooked something, let me know. But I’m going to see how I might reorient my giving to default as an asset-based giving (probably via Bitcoin) to any organization I give to from now on.
