And why they should matter to your nonprofit
Stock donations have been a trusted funding method for many US-based nonprofits for years, but the traditional methodology can be complex and cumbersome. Engiven's proprietary software allows nonprofits to enable their organization to receive stock donations in a way that is simple and stress-free, both for the donor and the nonprofit.
Understanding Stock Donations
- What is “Stock”?
Many people are familiar with the concept of purchasing shares of a company through an investment account. You can buy shares of companies such as Apple [AAPL], General Electric [GE], or TESLA [TSLA]…but what does it actually mean when you buy a share of a company?
Purchasing shares of a company (also called company “stock”) represents a fractional ownership of that company. While this is typically an infinitesimally small fraction of ownership, you as a shareholder are generally entitled to certain ownership rights such as voting on board members, receiving any applicable dividends, and receiving any applicable company assets following a liquidation event. Each case is unique, so seek appropriate counsel before investing and purchasing a company’s stock.
It is worth noting that not all company stock is available for purchase on public exchanges (e.g. Nasdaq); oftentimes companies issue Restricted stock or Preferred stock which typically cannot be traded on exchanges. Companies also hold stock for the purposes of treasury management, executive compensation, and capital raises (think of them raising money to fund their operations). A company can sell a fractional piece of ownership via stock sale and thus is able to put money in its capital account.
When you buy stock on an exchange, you are not purchasing directly from the company; you are purchasing from another individual or company who holds the stock (typically a stock broker or dealer).
- Taxes on the Sale of Stock
To fully understand the benefits of donating appreciated stock, it’s first helpful to understand how appreciated stock is taxed.
When a company performs well, the value of its company stock often grows (or “appreciates”). When a shareholder then goes to sell appreciated stock, the difference between the price at which it was bought and the price at which it was sold is viewed by the IRS as taxable gain and is subject to taxation.
The amount of tax due depends on how long the stock was held. If the stock was held less than 365 days, the gain is considered “short term” and is taxed at the taxpayer’s income tax rate. If the stock was held one year or longer, the gain is considered “long term” and is taxed as a “Long-Term Capital Gain”. (Generally, the Long-Term Capital Gain tax rate is less than the individual’s income tax rate.)
Example: If an investor buys shares of company XYZ in 2021 for $20,000 USD and sells them in 2023 for $50,000 USD, they have realized a $30,000 long-term taxable gain. Assuming the highest federal long-term capital gain tax rate of 23.8%, the investor’s net gain would be $30,000*(1-0.238)) = $22,860, paying $7,140 in taxes.
- Tax Benefits of Donating Stock
Donating appreciated stock provides two significant tax benefits to the shareholder-turned-donor:
- Avoiding capital gains taxes: Continuing the example from the previous section; if the investor bought shares of company XYZ in 2021 for $20,000 and donated them in 2023 when they were worth $50,000, they will avoid paying capital gains taxes on the $3000 gain.
- Claiming a charitable deduction: With their donation of $50,000, the donor can claim a tax deduction for the stock's full market value at the time of the donation. This means the donor can reduce their taxable income and lower their overall tax bill by up to $50,000 USD.
- Greater Impact to your Organization: In this example, your organization would net $50,000 in revenue instead of the cash donation of $22,860.
As you can see by the above example, donors can make a larger charitable impact to your nonprofit by donating their stock directly ($50,000 value) than by liquidating stock and donating the net proceeds of the sale ($22,860 value).
Why Your Organization Needs a Method to Accept Stock Donations
- Wealth is held in assets
When nonprofits and churches only accept cash donations, they inevitably cap their donors' giving potential. There is immense value in the non-cash market.
At the end of 2022, the US housing market was worth $45.3 trillion USD.
Also at the end of 2022, the total US stock market cap was $40.512 trillion USD.
The Federal Reserve's Flow of Funds Report showed that in the fourth quarter of 2022, the total net worth of households and nonprofit organizations in the United States was approximately $147.707 trillion, while total assets added up to $167.0906 trillion.
Below is a breakdown of asset types:
- Real estate: $47.89 trillion (28.66%)
- Pension Entitlements: $29.94 trillion (17.92%)
- Corporate Equities: $26.21 trillion (15.68%)
- Equity in Non-Corporate Business: $17.2 trillion (10.29%)
- Time and Savings Deposits: $10.4 trillion (6.23%)
- Mutual Fund Shares: $9.64 trillion (5.77%)
- Checkable Deposits and Currency: $4.95 trillion (2.96%)
- All Other Assets: $20.86 trillion (12.48%)
This means that stocks and mutual funds jointly account for 21.45% of US household net worth while cash and cash equivalents (currency + deposits) account for only 9.19%.
Given the enormous amount of non-cash assets available, it's clear that nonprofits and faith-based organizations must have simple pathways for their supporters to give non-cash donations. By doing so, they not only increase their donors' giving potential but also have the potential to receive larger donations than they would from cash donations alone.
- Donors prefer to donate assets
Most Americans are “asset rich and cash poor”, meaning that most of their net worth is in things like their homes, cars, and possessions. This means that fewer than 4 out of 10 Americans can pay an unexpected $1,000 dollar cash expense, even though recent studies show that the median household net worth is $121,000. For most people, the thought of giving cash to an organization seems daunting.
While cash donations remain a critical source of funding for many organizations, accepting non-cash donations can open up new opportunities for donors to give and for organizations to achieve their missions. As such, it is essential for nonprofits and churches to be open to accepting both cash and non-cash donations to help donors maximize their giving potential and make a difference in their communities.
How Stock Acceptance Traditionally Worked
Traditionally, receiving a stock donation involved the following steps.
Step 1: Nonprofit establishes a brokerage account
In this step, your nonprofit should work closely with its board of directors and/or financial advisors to select and activate a brokerage account. This account will receive transfers of stock from donors.
- What type of account best suits your needs
- Requirements for opening a brokerage account (the account application and new account agreement will establish the requirements)
- What minimums must be maintained in terms of assets held or transaction volume
- Who on your team will be responsible for managing the account, reviewing for new securities, selling the securities, donor receipting, reporting the sale to the IRS, etc.
- How your gift acceptance policy is set up to manage the custody & sale of securities. (e.g. how long can your organization hold the securities before they must be sold? What if they land in the account on the weekend?)
Step 2: Nonprofit publishes its eligibility to receive stock donations
In this step, your nonprofit would publicly share two things:
- Your eligibility to receive donations of stock
- The information necessary for willing donors to initiate a stock donation, including:
- Your nonprofit's registered name
- The name of your brokerage firm
- Your DTC (Depository Trust Company) number
- Your brokerage account number
Typically, this information would be published on your nonprofit's website and referenced in donor correspondence communications.
Step 3: A stock donation is initiated by a donor
Often, donors will reach out directly to the nonprofit, inquiring about the stock donation process. Sometimes they'll even include their financial advisors in the conversation, but neither is necessary. Donors can (and often do) initiate stock donations independently, without prior communication to the nonprofit recipient.
Step 4: Nonprofit regularly reviews brokerage account for donations
The nonprofit organization will need to regularly review their brokerage account for new donations (at a frequency which supports their gift acceptance policy). If your donor didn't reach out in step 3, their stock donation will likely come as a complete surprise. It's difficult to anticipate what you don't know is coming.
Step 5: Nonprofit sells the stock
Unless your nonprofit has a dedicated financial advisor to manage a complex financial portfolio, you'll probably want to liquidate your new stock holdings. Generally, the individual at the nonprofit responsible for liquidating the stock will place a market sell order. However, you’ll note in your brokerage account that there are other and more complex methods of selling stock including stop-loss and trailing stop-loss order types. It is recommended that the nonprofit consult with a financial or tax advisor regarding the implications of various sell-order types and their alignment with the Gift Acceptance Policy.
Step 6: Nonprofit corresponds with donor & IRS
While donations of stock are accompanied by a “paper trail”, that trail doesn't always lead back to individuals. If your donor used an advisor as an intermediary or gave through an entity or donor-advised fund, you may be unable to contact them directly.
Regardless, your nonprofit should issue a "Thank You" letter and a receipt, including the following information (for tax purposes):
- Name of the donor
- Date of the donation (i.e. the date the stock landed in your account)
- Description of the donated asset (i.e. stock ticker symbol and quantity of shares donated)
While it is the donor’s responsibility to establish the value of the donated asset for tax purposes, your organization is still required to file tax form 8282 to the IRS for each applicable donation. Refer to Form 8282 for specific instructions.
Why Engiven is the right choice:
Engiven simplifies the historically complex stock donation process, making it seamless and elegant for both donors and nonprofits. Our solution ensures an elevated stock giving experience for nonprofits and donors alike.
- Donor Information Capture: Nonprofits receive a customizable giving widget that provides an easy interface for donors to provide their information and initiate the stock donation process. No more guessing whether a gift is in process or who made the gift.
- Donor Completes Transfer: Donor completes transfer via simple DTS instructions which work with any brokerage or investment account.
- Swift Liquidation: All donated stocks are sold via public exchange upon receipt, and the resulting cash is deposited directly into the nonprofit's local bank account. Stock donations are processed through Renaissance Charitable Foundation, one of the largest stock donation custody & liquidation providers in the US. Your nonprofit is not required to receive or hold securities.
- Simplified Requirements: Most nonprofits utilizing Engiven Stock Giving don’t require changes to their Gift Acceptance Policy, since they are not holding, managing or selling securities. Additionally, Engiven Stock Giving takes care of donor receipting for your organization and eliminates the need for filing form 8282 with the IRS.
- Elegant Dashboard: From the moment a stock gift is initiated until the resulting cash is deposited in your account, your organization has visibility into the donation stage of all gifts. Engiven monitors gifts at every step, updating the nonprofit's dashboard so that they're up-to-date throughout the process. You’ll never have to guess what gifts are in the pipeline or who your donor was.
The giving widget and dashboard are mobile-enabled, and designed for donors and institutions on the go.
Want to learn how Engiven can enable your nonprofit to receive stock donations? Click here to schedule an online demo today!