How Do I Determine the Value of My Transferred Stock for Tax Deductions?
Determining the value of transferred stock for the purpose of figuring out your tax deduction depends on whether you sell the shares at a loss or donate them to a tax-exempt charity. Although the capital loss and charitable deduction rules are similar, slight differences exist that may result in a lower value for the charitable deduction on the same transferred stock. But if you prefer to make a donation, there is a way you can gift the stock and still maximize your tax savings.
Stock Value for Loss Deduction
Stock investments are capital assets, and when you transfer or sell them, the resulting loss is equal to your basis, or acquisition cost, in the shares minus the selling price. For most stocks that trade on a public exchange, this selling price is also the stock's fair market value at the moment the you execute the sale. But even if the stock doesn't trade publicly, fair market value is still used. Fair market value in this case is merely the price that buyers are willing to pay. You can determine fair market value in many ways, such as basing it on the prices obtained in recent sales of the same stock or with the range of offers you've received from potential buyers.
How Loss Deductions Work
With stocks, a potentially deductible capital loss is usually the result of acquiring the shares at a time when their fair market value is higher than at the time of sale. Before you can deduct this loss, you must use it to offset your capital gains first -- which helps you eliminate the tax you'd otherwise pay on these gains, though the savings can vary depending on whether the gains are short- or long-term. If the loss exceeds your gains, you can deduct up to $3,000 of the excess on your return to reduce the tax on other income, such as your employment wages and business earnings. In every future tax year until the loss is fully used, you always use the loss to offset gains before you can deduct another portion of it.
Stock Transferred as Charitable Donation
The way you value the transferred stock doesn't change just because you donate the shares instead of selling them. But if at the time of making the charitable donation, the fair market value of the portfolio is less than your basis, the amount of your charitable deduction cannot exceed this value. This means that if you paid $10,000 for stock that you donate to charity on a day the market value is $7,500 -- $7,500 is the most you can deduct.
Maximizing Your Tax Savings
In the event you're committed to making a charitable donation, you can maximize your tax savings by selling the stock and donating the proceeds to the charity instead of transferring the stock. In the aforementioned example, the donation is worth $7,500 whether you donate the sale proceeds or the stock. By selling the stock first, you not only get a $7,500 charitable deduction, but you also get to utilize the $2,500 capital loss that can offset gains, be deducted or both. If you donate the stock, all you get is the $7,500 charity deduction -- the $2,500 capital loss is permanently unavailable as an offset or a deduction.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.