What To Do Before Year-End

With tax law changes on the horizon, it\’s time to maximize year-end giving strategies to offset … [+] capital gains.


To say 2021 has been an interesting year in the market is an understatement. The Total Return on the S&P 500 for 2021 through 11/26/21 has been over 25%. Some stocks, like Moderna (MRNA), Ford (F), NVIDIA

(NVDA) or Nucor

(NUE) are up over 100%. The pressing question is what to do with a big gain?

You have some options:

1.     Sell it, and take your lumps in capital gain taxes

2.     Gift it to charity and get a write off

3.     Gift it to charity and replace it (the ‘Charity Swap’)­

4.     Gift it to charity and do a Roth conversion (the ‘Roth Offset’)

Sell it: Simplest of all options is to just sell some or all of the stock. If you hold it in your name in a taxable account, you will pay taxes. There is a substantial difference between assets held more than one year and those held one year or less. Assets held longer than one year are long-term capital assets are subject to long-term capital gain tax rates. The long-term capital gain rates can be pretty attractive, if you look at the 2021 rates below:

Current IRS long-term capital gains rates.

Leon LaBrecque

It’s worth noting that your capital gains tax rate for a married couple is 15% all the way up to $501,600 of taxable income. Assets held for one year or less are short-term capital assets and any gains are subject to ordinary income tax rates. There is also a Net Investment Income Tax (NIIT) of 3.8% on investment income (including capital gains) if your modified Adjusted Gross Income (MAGI is over $250,000 (married filing jointly) or $200,000 (Single). Thus, the maximum rate is 23.8%, plus applicable state taxes. Selling can be a good option, considering a bad market can easily erase gains.

Donate it: Donating appreciated property held more than one year can have a double tax advantage: you don’t pay capital gains tax on the donation, and you can get a deduction for the fair market value. Suppose you own some Tesla shares you paid about $400 per share for in October of 2020. You donate it to your Donor Advised Fund at a price of $1,100.  You save capital gain taxes on $700, including potential state taxes. You then also potentially get a deduction for the fair market value, presuming you can itemize deductions. If you are in a higher bracket, the tax savings would be about $166 per share of capital gain taxes (not counting state taxes), plus about $330 of income tax savings. Total tax savings is about $496 per share.

There are some rules: First, the fair market value deduction applies only to assets held over one year. Second, you only get the benefit if you itemize deductions: that is, your itemized deductions are greater than the standard deduction ($25,100 for married filing jointly, and $12,950 for single). Third, you have to make the donations to a qualified charity. An easy way to donate to a qualified charity is a Donor Advised Fund (DAF). Three of the largest DAFs are Fidelity, Schwab, and Vanguard. Fourth, you can only use donated property up to 30% of Adjusted Gross Income (AGI). If the value of the donated asset exceeds 30% of your AGI, you can carryover the remaining donation for up to five years.

Charity Swap: If you’ve donated assets to charity, but still like the security, you can re-buy it. Although there are ‘wash-sales’ loss rules, there are no ‘wash gains’ rules. In the above example, if you still like Tesla, you could buy it back immediately and your basis would reset to your new price. The basis reset is advantageous in a subsequent sale.

Roth Charity Offset: An interesting version of the charity swap is the Roth Charity Offset. You make a charitable donation of appreciated property, perhaps to a DAF. You now have a large deduction. You convert some of your IRA to a Roth IRA, which creates income which is in turn offset by the donation. Then, potentially, you can buy whatever you want back in the Roth, maybe even the same stock. So, if Tom and Marsha had 100 shares of Tesla, they could donate that to a DAF and get a $110,000 deduction (more or less) and avoid capital gains. They could convert part of their IRA to a Roth and offset the deductions, noting the 30% of AGI rule, and then buy whatever they want in the Roth, possibly even Tesla. Note that the Roth has now potentially tax-free growth, no RMD, and an investment horizon 10 years after the death of both spouses.

Bottom Line: Year-end in a volatile market can provide interesting opportunities for gain harvesting or gain ‘tempering.’ Look at your portfolio in your taxable accounts soon. You’ll want to process your donations according to your institution’s specific year-end giving deadlines. As always, I’m happy to try to answer questions: llabrecque@sequoia-financial.com.