I don’t know much about taxes—can you explain why this would help? I might want to do it myself :)
Currently though, it seems like you would pay the same amount of taxes in either case. Let’s take a small example—suppose you invested $75 two years ago, which is now worth $100. And let’s suppose it would be $125 in another two years, at which point you would sell it all.
Now currently you have to decide whether to donate $100 in cash, or to sell the $100 of stock and reinvest the $100 of cash into the stock. (I’ve heard of some law that prohibits you from re-buying the exact same stock, to avoid gaming the tax laws, but let’s ignore that for now—in any case, you could buy a different but similar stock.)
If you donate the $100 in cash, then:
You get a deduction of $100 on your taxes this year because of your donation
When you sell the $125 in two years, you realize a long-term gain of $50, which you pay taxes on
If you sell the $100 of stocks and reinvest the $100 in cash, then:
You get a deduction of $100 on your taxes this year because of your donation
You realize a long-term gain of $25 this year, which you pay taxes on
When you sell the $125 in two years, you realize a long-term gain of $25, which you pay taxes on
In both cases, you get a deduction of $100 this year, and you pay long-term capital gains taxes on $50 (albeit at different times). So unless you expect that your tax rate will be a lot higher in two years, it doesn’t seem like this is really helping.
In fact, since you sold and re-bought your stocks, you’ve reset the buy date, and now it’s possible that any gains you make will be short-term capital gains (if you sell the stock within a year), which would then be taxed at a higher rate.
If you donate the stock directly to a charity without selling it first, you don’t pay taxes on long-term gains. In your example, if you donate $100 of stocks and reinvest the $100 in cash, then you don’t pay taxes on the $25 capital gain. When you sell the $125 in two years, you pay taxes on a long-term capital gain of $25, compared to the gain of $50 if you donated the $100 in cash instead.
You’re right that you could end up paying more in taxes if you sold the stocks less than a year after reinvesting. Another caveat is that you can only deduct donations of stock up to 30% of adjusted gross income, unlike 50% for cash donations.
I don’t know much about taxes—can you explain why this would help? I might want to do it myself :)
Currently though, it seems like you would pay the same amount of taxes in either case. Let’s take a small example—suppose you invested $75 two years ago, which is now worth $100. And let’s suppose it would be $125 in another two years, at which point you would sell it all.
Now currently you have to decide whether to donate $100 in cash, or to sell the $100 of stock and reinvest the $100 of cash into the stock. (I’ve heard of some law that prohibits you from re-buying the exact same stock, to avoid gaming the tax laws, but let’s ignore that for now—in any case, you could buy a different but similar stock.)
If you donate the $100 in cash, then:
You get a deduction of $100 on your taxes this year because of your donation
When you sell the $125 in two years, you realize a long-term gain of $50, which you pay taxes on
If you sell the $100 of stocks and reinvest the $100 in cash, then:
You get a deduction of $100 on your taxes this year because of your donation
You realize a long-term gain of $25 this year, which you pay taxes on
When you sell the $125 in two years, you realize a long-term gain of $25, which you pay taxes on
In both cases, you get a deduction of $100 this year, and you pay long-term capital gains taxes on $50 (albeit at different times). So unless you expect that your tax rate will be a lot higher in two years, it doesn’t seem like this is really helping.
In fact, since you sold and re-bought your stocks, you’ve reset the buy date, and now it’s possible that any gains you make will be short-term capital gains (if you sell the stock within a year), which would then be taxed at a higher rate.
If you donate the stock directly to a charity without selling it first, you don’t pay taxes on long-term gains. In your example, if you donate $100 of stocks and reinvest the $100 in cash, then you don’t pay taxes on the $25 capital gain. When you sell the $125 in two years, you pay taxes on a long-term capital gain of $25, compared to the gain of $50 if you donated the $100 in cash instead.
Here’s an article that describes this in more detail: http://www.fivecentnickel.com/2010/04/30/reset-your-investment-cost-basis-with-charitable-donations/ It also mentions the wash sale rule, which might be the law that you were thinking of. That rule only applies if you sell assets at a loss, so it wouldn’t come into play here.
You’re right that you could end up paying more in taxes if you sold the stocks less than a year after reinvesting. Another caveat is that you can only deduct donations of stock up to 30% of adjusted gross income, unlike 50% for cash donations.