Charitable donations often come with valuable tax benefits, but an overlooked aspect of the tax code can quietly reduce both the impact of a gift and the value of the deduction.
In its education materials on gifting appreciated assets, Fidelity walks through why selling first and donating the proceeds usually leaves both the donor and the charity with less than a direct stock donation would
Americans gave a record $592.50 billion to charity in 2024, with individuals accounting for $392.45 billion, according to the Giving USA Foundation.
The surge was partly fueled by stock market gains, although many donors likely chose to sell their shares first and donate the proceeds rather than gift the securities themselves.
Tax changes under the One Big Beautiful Bill Act tightened deduction rules effective January 1, 2026, with Schwab and Morningstar both publishing analyses explaining the impact on donors.
Why Fidelity’s example favors donating stock over selling first
When it comes time to support a favorite cause, most people instinctively reach for their checkbook or make a cash donation to the organization.
Automatically selling appreciated stock can trigger an unnecessary capital gains tax liability, increasing the overall cost of the transaction.
Consider an investor who owns shares valued at $5,000, originally purchased for $2,500, and intends to make a $5,000 charitable donation.
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If the shares are sold before the donation is made, the transaction triggers a long-term capital gains tax. At a 15% tax rate, the $2,500 gain results in a tax liability of $375.
As a result, only $4,625 remains available for the charitable contribution, while the potential tax deduction is reduced by the same $375 amount, according to Fidelity.
Donating the shares directly allows the charity to receive the full $5,000 value and enables the donor to deduct the stock’s full fair market value for tax purposes.
The organization can then sell the donated stock at its full value and keep 100% of the proceeds because it is tax-exempt, the firm explained.
How much the gap widens at higher portfolio values
The $375 gap in the firm’s simplified example only hints at the true cost to donors with larger appreciated stock positions.
Schwab’s analysis models a donor in the top 37% bracket holding stock worth $750,000 with a $100,000 cost basis, representing $650,000 in gains.
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Selling that position first triggers $154,700 in combined capital gains and net investment income taxes at the 23.8% rate, Schwab calculated.
Under the sell-first method, the donor walks away with just $49,280 in total tax savings after accounting for the reduced deduction and the tax bill.
Donating the stock directly to the charity produces $258,125 in tax savings under Schwab’s figures, a difference of more than $208,000 from one decision.
New deduction limits add urgency for donors planning for 2026
The One Big Beautiful Bill Act, signed into law on July 4, 2025, introduces two changes that reduce the value of deductions for higher-income taxpayers. Both changes take effect in the 2026 tax year.
The 0.5% AGI floor applies to every taxpayer who itemizes charitable deductions, while the 35% deduction cap applies only to taxpayers in the top 37% bracket, Schwab stated.
A new 0.5% floor on adjusted gross income will apply to itemized charitable deductions, meaning only contributions exceeding that threshold will qualify.
Justin Miller, partner and national director of wealth planning at Evercore Wealth Management, told attendees at the American Institute of CPAs National Tax Conference that the floor is unlikely to reshape giving decisions at the top, but it still costs high-income donors real dollars.
Hopefully that doesn’t change behavior for someone making over a million dollars who’s giving to charity, but it is a haircut
For a donor earning $500,000 in adjusted gross income, the first $2,500 in charitable gifts would produce no deduction benefit, Schwab noted.
The law also caps the effective deduction rate at 35% for taxpayers in the 37% bracket, a provision commonly called the 2/37 rule.
On substantial charitable gifts, the reduction in effective deduction value adds up, retirement expert Ed Slott told Morningstar in a January 2026 interview.
Donor-advised funds can help lock in the current deduction rules
Contributions of cash or appreciated securities made to the fund under the existing rules may qualify for a tax deduction in the year they are made.
Donors can then recommend grants from the fund to eligible charities over time, allowing charitable giving to be distributed across months or years while preserving the tax benefits associated with the original contribution.
Assets held within a donor-advised fund can grow tax-free until grants are recommended to eligible charities, providing both flexibility and time to choose recipients.
Fidelity Charitable, DAFgiving360 (formerly Schwab Charitable), and Vanguard Charitable each operate donor-advised fund programs, and several independent charitable sponsors offer similar vehicles.
“Now is a great time for investors to review their charitable giving strategies to see if donating appreciated securities makes sense for them,” said Garrett Harbron, J.D., CFA, CFP®, Vanguard head of advised wealth management strategies.
