In-Kind Charitable Donations: Tax Traps and Capital Gains Strategies

Tax Traps and Capital Gains Strategies for In-Kind Charitable Donations

Supporting a charitable organization does not always require writing a check. Taxpayers may also donate investments, real estate, cryptocurrency, business interests, artwork, vehicles, inventory, and other property.

These in-kind charitable donations can create valuable tax-planning opportunities, particularly when an asset has significantly appreciated. However, the tax treatment is not as simple as deducting the asset’s current value.

The type of property, how long it was owned, the recipient organization, the asset’s intended use, and the donor’s documentation can all affect the deduction. A mistake in any one of these areas may reduce or completely eliminate the anticipated tax benefit.

Why Donate an Appreciated Asset Instead of Cash?

When a taxpayer sells an appreciated asset, the increase in value may generate a taxable capital gain. Donating the asset directly to a qualified charitable organization may allow the taxpayer to avoid recognizing that gain while potentially claiming a charitable contribution deduction.

Consider this simplified example:

A taxpayer purchased publicly traded stock for $20,000 several years ago. It is now worth $50,000.

If the taxpayer sells the stock, the $30,000 increase may be subject to federal capital gains tax and possibly the 3.8% net investment income tax. State taxes may also apply.

If the taxpayer transfers the shares directly to an eligible public charity, the taxpayer may be able to:

• Avoid recognizing the $30,000 unrealized capital gain
• Claim a charitable deduction based on the stock’s $50,000 fair market value
• Allow the charity to receive the asset’s full value

The deduction remains subject to adjusted gross income limitations, the taxpayer’s ability to itemize, and the substantiation rules discussed below.

Tax Trap No. 1: Selling the Asset Before Making the Donation

One of the most common mistakes is selling an appreciated investment and then donating the cash proceeds.

Once the asset is sold, the taxpayer generally recognizes the capital gain. Donating the resulting cash may create a charitable deduction, but it does not undo the taxable sale.

When appropriate, transferring the asset directly to the charity may preserve more value for the charitable organization and produce a better overall tax result.

Taxpayers should confirm that the organization can accept the asset before initiating the transfer. Donations of stock, real estate, cryptocurrency, and closely held business interests often require additional coordination.

Tax Trap No. 2: Donating Property Held for One Year or Less

The asset’s holding period can materially change the deduction.

Property that would create a long-term capital gain if sold is generally treated as capital gain property. In many cases, qualifying capital gain property donated to a public charity may be deducted at fair market value.

Property held for one year or less is generally treated as ordinary income property because its sale would produce ordinary income or a short-term capital gain. The deduction is ordinarily reduced by the income or short-term gain that would have been recognized on a sale. As a result, the deduction may be limited to the taxpayer’s adjusted basis.

Before donating an investment, taxpayers should review the available tax lots and consider transferring shares that:

• Have been held for more than one year
• Have the largest unrealized appreciation
• Have a reliable and documented cost basis
• Are accepted by the intended charity

Selecting the correct tax lot is critical. Donors should provide specific written instructions to the financial institution rather than relying on its default lot-selection method.

Tax Trap No. 3: Assuming Every Donation Is Deductible at Fair Market Value

Although fair market value is often the starting point, it is not automatically the deductible amount.

A deduction may need to be reduced when the donated property would have produced ordinary income if sold. Common examples include:

• Business inventory
• Investments held for one year or less
• Artwork created by the donor
• Certain depreciated business assets subject to recapture
• Accounts receivable
• Property held primarily for sale to customers

The IRS defines fair market value as the price at which property would change hands between a willing buyer and willing seller when neither is required to act and both understand the relevant facts.

Taxpayers should not rely on the asset’s original cost, insurance value, sentimental value, or an informal online estimate when a qualified valuation is required.

Tax Trap No. 4: Ignoring the Charity’s Use of the Property

Special rules can apply to donations of tangible personal property, including artwork, collectibles, equipment, and vehicles.

If the charity’s use of the property is unrelated to its tax-exempt purpose, the donor may be required to reduce the deduction. For example, donating artwork to a museum that will exhibit it may receive different treatment than donating the same artwork to an organization that immediately sells it to fund unrelated operations.

The donor should ask how the organization plans to use the property and retain written documentation supporting that intended use.

Additional consequences may arise if the charity disposes of certain donated property within three years. Depending on the circumstances, the donor may need to report income or obtain a certification from the charity explaining how its use furthered the organization’s charitable purpose.

Tax Trap No. 5: Donating to the Wrong Type of Organization

The recipient must be an eligible organization for the donor to claim a charitable contribution deduction. Gifts made directly to individuals, even when the recipient is experiencing financial hardship, are not deductible charitable contributions.

Before transferring property, donors should verify the organization’s status using the IRS Tax Exempt Organization Search tool.

The type of qualified organization also matters. Donations of appreciated property to public charities and donor-advised funds can receive different treatment from donations to certain private foundations. In some cases, a donation to a private nonoperating foundation may be limited to the donor’s basis rather than the asset’s fair market value.

Tax Trap No. 6: Waiting Until the Final Days of the Year

An in-kind contribution is generally deductible for the year in which the gift is completed. Beginning the process on December 31 does not guarantee a deduction for that tax year.

Transfers involving brokerage accounts, real estate, privately held companies, or cryptocurrency may require time for:

• The charity to approve the gift
• Transfer documents to be prepared
• Legal restrictions to be reviewed
• A qualified appraisal to be completed
• Financial institutions to process the transfer
• Ownership to legally pass to the charity

Taxpayers planning a year-end donation should begin well before the deadline and obtain confirmation showing when the charity received the asset.

Tax Trap No. 7: Overlooking Form 8283 and Appraisal Requirements

Noncash charitable contributions come with specific reporting and recordkeeping rules.

A taxpayer generally must attach Form 8283 to the return when the deduction for a noncash contribution exceeds $500.

For deductions greater than $500 but not more than $5,000, the taxpayer generally completes Section A. Donations exceeding $5,000 typically require Section B and a qualified appraisal. Publicly traded securities are a notable exception to the general appraisal requirement, although reporting requirements still apply.

When the claimed deduction exceeds $500,000, the qualified appraisal generally must also be attached to the tax return.

The $5,000 threshold applies to an item or group of similar items. Dividing similar property among multiple charities does not necessarily avoid the appraisal requirement.

A charity’s signature on Form 8283 acknowledges receipt of the property. It does not confirm the property’s value or guarantee that the IRS will accept the deduction.

Cryptocurrency Requires Special Attention

Taxpayers sometimes assume that cryptocurrency is treated like publicly traded stock for appraisal purposes. It generally is not.

Cryptocurrency is treated as property for federal income tax purposes, but it does not automatically qualify for the publicly traded securities exception. A taxpayer claiming a deduction exceeding $5,000 for donated cryptocurrency may need a timely qualified appraisal, even when the asset’s price is readily available through an exchange.

The donor should also retain records showing:

• The date and time of the transfer
• The amount and type of cryptocurrency donated
• The wallet addresses involved
• The taxpayer’s cost basis and holding period
• The charity’s written acknowledgment
• How the reported fair market value was established

The Written Acknowledgment Rule

For a contribution of $250 or more, the donor generally must obtain a contemporaneous written acknowledgment from the charity.

The acknowledgment should include:

• The organization’s name
• A description of the donated property
• Whether the donor received any goods or services in exchange
• A description and good-faith estimate of those goods or services, if applicable

The charity generally does not assign a value to donated property. Establishing the deductible value remains the donor’s responsibility.

The acknowledgment should be received by the earlier of the date the taxpayer files the return or the return’s due date, including extensions. A canceled transfer record or brokerage statement alone may not satisfy the acknowledgment requirement.

Beware of Prearranged Sales

Donating an asset shortly before a sale can create an assignment-of-income issue.

If a sale is already legally binding or practically certain before the donation is completed, the IRS may argue that the donor, rather than the charity, should recognize the gain. This risk frequently arises with:

• Closely held stock before a company sale
• Real estate already under contract
• Partnership or LLC interests involved in a pending transaction
• Assets subject to an existing redemption agreement

The distinction often depends on the facts and timing. Anyone considering a donation during a pending transaction should consult tax and legal advisors before signing a sale agreement or committing to the transaction.

Watch for Debt Attached to Donated Property

Donating property subject to a mortgage or other debt can create an unexpected taxable event.

The transaction may be treated partly as a charitable contribution and partly as a sale, commonly called a bargain sale. The donor may need to recognize taxable gain based on the debt assumed by the charity or otherwise connected to the transfer.

Debt-financed real estate and partnership interests require particularly careful analysis because liabilities can affect both the donor’s basis and the amount realized.

Understand the Adjusted Gross Income Limitations

Even when a donation qualifies, the entire deduction may not be usable in the current year.

Different adjusted gross income limits apply based on:

• Whether the contribution is cash or property
• Whether the asset is capital gain property
• The type of organization receiving the gift
• Whether the taxpayer elects to reduce the contribution’s value
• Other charitable contributions made during the year

A deduction for long-term appreciated property contributed to a public charity is commonly subject to a limit of 30% of adjusted gross income. Different limits can apply in other circumstances. Qualifying contributions that exceed the applicable limit may generally be carried forward for up to five years, but unused amounts can expire.

Beginning in 2026, individual taxpayers who itemize are also subject to a new charitable deduction floor. Generally, only the portion of an individual’s otherwise eligible charitable contributions exceeding 0.5% of the taxpayer’s contribution base may be deductible.

For example, if a taxpayer’s contribution base is $300,000, the first $1,500 of otherwise eligible charitable contributions may not produce an itemized deduction under the new floor.

Taxpayers in the highest federal income tax bracket may also face a limitation on the value of itemized deductions. These changes make it important to evaluate charitable contributions as part of a broader multiyear tax plan.

What About Taxpayers Who Do Not Itemize?

Beginning with the 2026 tax year, taxpayers who do not itemize may deduct up to $1,000 of qualifying cash contributions, or up to $2,000 for married couples filing jointly.

This above-the-line deduction applies to certain cash contributions. It does not generally apply to donations of stock, cryptocurrency, real estate, or other property.

A taxpayer considering an in-kind donation should therefore not assume that the new non-itemizer deduction will apply.

Consider Bunching Charitable Contributions

Taxpayers may benefit from grouping several years of planned donations into a single tax year. This strategy is commonly called bunching.

By making a larger contribution in one year and taking the standard deduction in surrounding years, a taxpayer may be able to overcome both the standard deduction and the new 0.5% charitable deduction floor.

A donor-advised fund may support this strategy. The taxpayer can contribute appreciated assets to the fund, potentially claim a deduction in the year of contribution, and recommend grants to operating charities over time.

However, a contribution to a donor-advised fund is irrevocable. The sponsoring organization maintains legal control of the assets, and the donor may recommend grants but cannot reclaim the property.

Coordinate Charitable Giving With Portfolio Planning

Appreciated securities can also be incorporated into a broader portfolio strategy.

A taxpayer may donate low-basis shares and use available cash to purchase investments that align with the taxpayer’s desired portfolio allocation. This can remove embedded gains from the portfolio while establishing new investments with a higher cost basis.

Taxpayers should be careful when combining charitable giving with tax-loss harvesting. Wash-sale rules may disallow a loss when the taxpayer purchases the same or substantially identical security within 30 days before or after selling it at a loss.

The donated shares and any replacement investments should be selected in coordination with the taxpayer’s tax and investment advisors.

A Practical Checklist Before Donating Property

Before completing an in-kind charitable contribution, consider the following questions:

1. Is the recipient an eligible charitable organization?
2. Does the organization accept this type of asset?
3. Has the property been held for more than one year?
4. What is the taxpayer’s adjusted basis?
5. Would a sale produce capital gain, ordinary income, or depreciation recapture?
6. Is the asset subject to debt or transfer restrictions?
7. Is a sale, redemption, or other transaction already pending?
8. Will the charity use the property for a purpose related to its mission?
9. Is a qualified appraisal required?
10. Will Form 8283 or other documentation be required?
11. How will the contribution affect the taxpayer’s adjusted gross income limits?
12. Has enough time been allowed to complete the transfer before year-end?

Strategic Giving Requires Advance Planning

In-kind charitable donations can support meaningful causes while helping taxpayers manage concentrated investments, unrealized gains, and long-term tax exposure. But the intended tax benefit depends on properly structuring the gift before the asset is sold or transferred.

At Kamish & Associates, we help individuals and business owners evaluate charitable contributions within the larger picture of their income, investments, business interests, and long-term financial goals.

If you are considering donating stock, cryptocurrency, real estate, a business interest, or another valuable asset, contact Kamish & Associates before completing the transfer. Thoughtful planning can help you avoid an expensive tax trap while making the greatest possible impact with your contribution.

This article is intended for general informational purposes and does not constitute tax, legal, or investment advice. Tax treatment depends on the donor, the asset, the recipient organization, and the specific circumstances surrounding the contribution.