Making Lemonade From Lemons: Long-Term Capital Loss Stocks Create Another Kind of Tax-Efficient Charitable Giving Opportunity

For those of us who work in wealth management, 2022 will long be remembered as the year the stock market took its earnings back – far and wide – to pre-pandemic levels. 2021 ended on a high note… indexes reached near all-time highs, after rising after falling in early 2020 as the pandemic took hold and the economy came to a halt. At the end of 2021, charitable donations of long-term capital gain stocks were the norm and plentiful.

Then markets began to slide as January slipped into February and valuations, including bond values ​​as interest rates were raised by the Fed, hit investors who had long relied on a balanced portfolio to weather the storm. the storms of market volatility. As 2022 draws to a close, investors are seeing signs of a recovery in market value, but it looks like it could be a very slow, volatile, and long climb ahead.

Donors may feel that what would have been a great tax-efficient opportunity to use long-term appreciated stocks has passed…and it may have gone on for a while. But let’s not forget the other side of the charitable giving sword: using long-term capital losses to fund charitable giving.

How could this work? A sale of shares held for more than one year and whose value has fallen below its base or purchase price may result in a loss, and the proceeds of the sale may be used for a charitable donation.

Let’s say you bought or inherited stocks with a base of $5,000 and held them for more than a year. The current value is $1,000. If you sell it, your loss is $4,000, which can be used to offset gains now or in future years as a carryforward. What gains? Many mutual funds report gains even in years when the stock market has experienced an overall decline, so many investors will have realized gains in their portfolios even if they haven’t sold anything. Losses can be used to offset gains.

You can use the $1,000 proceeds to donate stock to charity and if you itemize, you can take an itemized deduction for that $1,000. That’s a lot of tax savings, now and in the years to come.

Consult your tax or financial advisor to learn more about this opportunity and how it may apply to your situation before December 31, 2022.

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