What Australia can Learn from USA Stock Donations
I remembered reading about the concept of donating stocks in the US (e.g. on Fidelity), and it seemed like a great deal that people were making good use of. It wasn't until recently that I've been able to work out why it works so well in the US, and why it's not really utilised in Australia.
In the US, donating stocks has 2 benefits (IRS reference):
- You do not pay capital gains tax on the stocks donated that have been held long term. Making it an excellent way to dispose of stocks with a low cost-basis.
- You can deduct the full fair market value of the stocks at the time of donation in your taxes.
In Australia, by comparison, you only get the second benefit. Capital gains are always realised as income at the time of disposal, including when donating.
Now because the gains earned are less than the amount donated, you still end up ahead tax-wise. However, compared with donating cash, the ATO (Australia's IRS equivalent) takes part of the benefit (the capital gains tax) and you take the rest (the stock value + your part of the capital gain).
Side Note: Here's a worked example for clarity, assuming domestic currency for simplicity and the appropriate registered charity status for tax-deductible donations.
Scenario: Donating stock worth $10k with a cost basis (purchase price) of $5k that was held long term (12 months+).
USA:
- Tax deduction for donation: $10k
- Capital gains payable: $0
- Net deduction: Full $10k deduction against taxable income.
Australia:
- Tax deduction for donation: $10k
- Capital gains payable: $2.5k (5k gain, 50% discounted for long term hold)
- Net deduction: $10k - $2.5k = $7.5k.
What This Leads To
In Australia, you're no better off disposing of stocks vs just donating cash, so there is no reason to sell stocks if you have disposable cash to donate instead.
In the USA, you're better off donating stocks. This means that for individuals with large stock portfolios, it strongly encourages them to dispose of it via giving rather than for personal gain.
What Should Australia Do?
This is a much more philosophical and political discussion. In Australia, where the wealthiest 20% of people own 80% of the stocks, and much of their remaining wealth is likely tied up in illiquid assets like property. Given this concentration of wealth, Australia should create stronger incentives for individuals to donate a larger portion of their stock holdings to charitable causes. A clear way to do that, is to abolish capital gains on stock donations.