Reminding clients about stock gifts
As an attorney, CPA, or financial advisor, you’re well aware that your clients are typically better off from a tax perspective if they donate appreciated stock (held for more than one year) instead of writing a check. That’s because the client’s charitable deduction is calculated based on the stock’s fair market value, and the nonprofit (unlike your client) can sell the stock without triggering capital gains tax. An easy process to do through a donor-advised fund at the Idaho Community Foundation (ICF).
So, what happens when a client starts asking questions about what’s on their tax return? For instance:
- "Wait a minute, I distinctly remember that my stock was worth $81.95 per share when the market closed on the day I transferred 100 shares. But my tax return shows a deduction amount less than $8,195. Is that a mistake?"
It's a great question, and of course you know the answer! Although the deduction is based on the fair market value*, that figure is not ordinarily the closing price. Instead, the IRS valuation rule** generally uses the average between the highest and lowest quoted selling prices on the date of the contribution.
Here's a simple example: suppose a client transfers shares to a donor-advised fund at ICF on August 20. On that date:
- High price: $82.40
- Low price: $79.60
- Closing price: $81.95
Many clients understandably assume their deduction will be based on the $81.95 closing price. Under the applicable valuation rules, however, the value generally used is the average of the high and low prices:
- ($82.40 + $79.60) ÷ 2 = $81.00 per share
The difference may be relatively small in many cases, but for larger gifts, or during periods of market volatility, it can become meaningful.
And again, yes, you know this! But many clients do not. That’s why it’s a good idea to remind a client about this rule when they’re making gifts of appreciated stock.
It is also important to remember that determining the valuation date itself may involve additional analysis. The relevant date is generally the date the gift is considered complete for federal tax purposes, which may differ depending on how the securities are transferred and when control passes to the nonprofit. Because of these nuances, it's wise to coordinate closely with the ICF team whenever timing is critical, such as at year end.
Fortunately, ICF staff work with gifts of appreciated securities every day and can help facilitate smooth transfers. Especially as year end approaches, clients often focus on maximizing charitable deductions while avoiding capital gains tax on appreciated investments. Being prepared to explain why the deduction is based on the average of the day's high and low, not simply the closing price, can be a helpful component of client conversations.
Please reach out to us anytime, and especially when a client is getting ready to transfer stock. We will keep an eye out for it and make sure the processing goes smoothly. Thank you for the opportunity to work with you to serve your clients!
*Internal Revenue Code Section 170 and Treasury Regulation § 1.170A-1(c)
**Treasury Regulation § 20.2031-2(b)(1)