Stock Giving Strategies: Tax-Loss Harvesting

Tax-loss harvesting is a popular strategy for making adjustments in a stock portfolio and mitigating tax exposure for securities that have declined in value, either over a short or long term period. The idea is to sell stocks and claim a loss, which can offset an equal measure of capital gains made in the same period. Individuals can also claim up to a $3,000 deduction of losses against their ordinary income. This is all documented using the Schedule D of IRS Form 1040. The second step is to use the funds to purchase a different stock that has a high correlation with the stock sold, or one that is different if a new strategy is desired. If all of the proceeds from the harvested loss are reinvested in a new security, then the individual is equally invested in the market but has gained a tax deduction that reduces their capital gains. This article goes into greater detail on how and when to do tax-loss harvesting.

Fundraisers understand that donors use charitable giving to reduce their tax exposure, so donating securities can be a complementary strategy to tax-loss harvesting. While harvested losses can offset some of the gains made, an investor will often finish the year with a net capital gain and a desire to further reduce this tax liability. Donating appreciated stocks to their favorite charity will not only eliminate the capital gain from sale of that security, it will also present a charitable tax deduction that can be applied against their ordinary income. 

This strategy does not work as well when a harvested loss is donated as cash. In this scenario, the investor has committed the cardinal sin of "buying high and selling low" and while they will claim a charitable tax deduction for the value of the cash donated, they haven't avoided any additional capital gains tax by donating stock directly. Donating appreciated stock and harvesting losses are two complementary strategies for mitigating capital gains on securities that have increased in value and should be done in tandem. This article walks through three scenarios to illustrate the advantage of combining loss harvesting with donating stock, including a scenario of donating cash from shares sold. 

Finishing out the year with zero capital gain tax liability can be very satisfying, with the overall value of the portfolio potentially having increased while adjustments were made throughout the year to harvest losses, reinvest in better securities, and donate appreciated stocks to charities. Savvy donors would rather give their money to trusted charitable organizations than to the IRS if they believe that their donation is an "investment" in a mission, campaign, or institution that is making a tangible impact in their community. Fundraisers have the opportunity to partner with donors in their financial planning as they trim their portfolio and tax liability for the year, while delivering a compelling story of impact from their contributions.