By Jody Dilday, Philanthropic Advisor]
As an attorney, CPA, or financial advisor, you know that donating appreciated stock held for more than one year can be more tax-efficient than writing a check.
The client’s charitable deduction is generally based on the stock’s fair market value, while the charity can sell the stock without triggering capital gains tax. Many clients regularly use appreciated securities to make gifts to their donor advised funds at Arkansas Community Foundation.
But here’s a question clients sometimes ask:
“My stock was worth $81.95 per share when the market closed on the day I transferred 100 shares to the Community Foundation. Why is my deduction less than $8,195?”
The answer comes down to how the IRS determines fair market value.
When publicly traded securities are contributed to a fund at the Community Foundation—or directly to another public charity—the charitable deduction is generally based on fair market value under Internal Revenue Code Section 170 and Treasury Regulation § 1.170A-1(c).
For publicly traded securities, however, fair market value is generally the average of the highest and lowest quoted selling prices on the date of the contribution—not the closing price. This methodology appears in Treasury Regulation § 20.2031-2(b)(1).
Here’s a simple example.
Suppose a client transfers shares to a donor advised fund at the Community Foundation on August 20. That day:
- High price: $82.40
- Low price: $79.60
- Closing price: $81.95
The client may expect the deduction to be based on the $81.95 closing price. Instead, the applicable valuation rule generally uses the average of the high and low prices:
($82.40 + $79.60) ÷ 2 = $81.00 per share
For 100 shares, that means a charitable deduction of $8,100, rather than $8,195.
The difference may be modest for a small gift, but it can become meaningful for larger contributions or during periods of market volatility.
And while you probably know this rule, your clients may not. A quick reminder can help avoid confusion when they review their tax returns.
Timing matters, too.
The valuation date itself can require additional analysis. Generally, the relevant date is when the gift is considered complete for federal tax purposes, which can depend on how the securities are transferred and when control passes to the charitable organization.
That’s especially important when a client is trying to complete a gift before year-end.
We work with gifts of appreciated securities every day. If a client is considering a stock gift, reach out to the Community Foundation early. We can help make the transfer process as smooth as possible.
Thank you for the opportunity to work alongside you and your clients!