How Donor-Advised Funds and Donating Appreciated Stock Can Save You Big on Taxes
Popularized by savvy tax planners—and used by wealthy individuals for decades—this approach allows you to get a generous tax deduction now, avoid capital gains taxes, and decide later which charities get the money.
If you’ve ever wondered how high-income earners and investors minimize their tax bills in a way that’s completely legal, the strategy of using a Donor-Advised Fund (DAF) and donating appreciated stock is worth understanding.
What Is a Donor-Advised Fund (DAF)?
A Donor-Advised Fund is essentially a charitable giving account held at a public charity (often through services like Fidelity Charitable, Schwab Charitable, or Vanguard Charitable).
Here’s how it works:
You contribute assets to the DAF—cash, stocks, or other securities.
You take an immediate tax deduction in the year of the contribution.
The assets can be invested and grow tax-free inside the fund.
You recommend grants (donations) from the DAF to qualified charities whenever you want.
Once contributed, the money is irrevocably given to charity (you can’t take the funds back for personal use), but you retain advisory privileges about how and where the money is distributed.
Why Donate Appreciated Stock Instead of Cash?
One of the most powerful parts of this strategy is donating stock or securities that have increased in value since you bought them.
Consider the tax implications of holding an investment that’s risen substantially:
If you sold the stock, you’d likely owe capital gains tax on the gain.
But if you donate that stock directly to a DAF, you can avoid that tax completely and still take a deduction for the full fair market value of the shares.
Example:
Suppose you bought shares years ago for $10,000 and they’re now worth $50,000. If you sell, you could owe taxes on the $40,000 gain. But if you donate the shares directly to a donor-advised fund instead, you avoid the capital gains tax entirely, and you still get to deduct the $50,000 value as a charitable contribution.
This is what makes the strategy especially attractive: you expand your charitable impact while reducing your taxable income and avoiding a capital gains tax bill.
Why Use a DAF Instead of Giving Directly to Charity?
If your main goal is simply to support non- profits, why not just donate directly?
There are a few strategic advantages to using a donor-advised fund:
1. Immediate Tax Benefits, But Flexible Giving
You get the full tax deduction in the year you fund the DAF—even if you wait years to distribute the money to charities of your choice.
2. Bunching Donations
Because of limits like the standard deduction on individual tax returns, smaller annual charitable donations sometimes don’t provide a meaningful deduction. But you can “bunch” several years’ worth of giving into one year by contributing a large amount to a DAF, then distribute it over time—capturing a significant deduction when it matters most.
3. Tax-Free Growth
Assets inside the DAF can be invested and grow tax-free while you decide how to distribute them.
Who Uses This Strategy?
This isn’t just a niche approach for Wall Street elites. It’s widely discussed among financial planners for people with:
High-income years due to bonuses or business sales
Large appreciated positions in stocks, ETFs, or other investments
Desire to reduce capital gains taxes while maximizing charitable impact
Even retirees and everyday investors with long-term appreciated assets can benefit from this strategy when it’s appropriate for their financial and tax situation.
Talk to Your Tax Professional
As powerful as this strategy can be, it’s not a one-size-fits-all solution. Tax laws change and individual circumstances vary. Always talk to your tax advisor or financial planner before implementing a donor-advised fund plan. Every situation—especially involving large appreciated assets—has nuances that are important to consider.