Advanced Tax Strategies for Donating Equity Awards

May 28, 2024 Caleb Lund
Discover which types of equity compensation can be donated to charity, and what the potential tax benefits of those donations may be.

Many people who have equity compensation are both concentrated in their company stock and charitably minded. What if you could manage both by donating stock?

Equity compensation can make an excellent gift to charity because of the potential charitable impact and tax benefits available to the donor. If you donate these stock awards directly to charity (rather than selling them first and then donating cash proceeds) you may be able to eliminate capital gains tax you would have paid, resulting in up to 20% more to charity. In addition, you may claim a fair market value deduction for your gift.

Donor-advised funds, which are 501(c)(3) public charities, are an excellent gifting option for donations of company stock awards, as the funds typically alleviate the tax burden on what is often highly appreciated stock.

Image illustrates how a donor can donate vested or exercised awards to a donor-advised fund where account assets are invested for tax-free potential growth and can ultimately benefit a charity.

Please be aware that gifts of appreciated non-cash assets can involve complicated tax analysis and advanced planning. This article is only intended to be a general overview of some donation considerations and is not intended to provide tax or legal guidance. In addition, all gifts to donor-advised funds are irrevocable. Please consult with your tax or legal advisor.

Equity compensation awards generally aren't transferable until vested or exercised

The most common forms of equity compensation awards are typically restricted stock units (RSUs), restricted stock awards (RSAs), non-qualified stock options (NSOs), and incentive stock options (ISOs). The awards themselves are generally not transferable and therefore cannot be given to charity. However, once these awards are vested and/or exercised—and the underlying stock is held for more than one year—they can make excellent tax-smart charitable gift options.

What types of equity compensation can be donated to charity?

Not all equity compensation awards are treated the same when it comes to the charitable income tax deduction. As illustrated below, ideal gift options should meet IRS holding period requirements of at least more than one year and have high appreciation above your cost basis. Such gifts enable you to potentially eliminate capital gain tax on the difference between fair market value on the date donated and fair market value when vested or exercised, while also claiming a charitable income tax deduction.

  • Equity compensation awards
  • Tax treatment upon vesting or exercise
  • Your charitable gift option
  • Potential tax benefits
  • Gift rating
  • Equity compensation awards
    Vested Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs) held greater than 1 year from vesting§§
  • Tax treatment upon vesting or exercise
    Ordinary income tax on difference between fair market value (FMV) at vesting and amount paid for your stock
  • Your charitable gift option
    Eliminate capital gain recognition on difference between cost basis and FMV at gift date
  • Potential tax benefits
    Deduction at FMV, up to 30% of your adjusted gross income (AGI), with 5-year carryover
  • Gift rating
    Ideal
  • Equity compensation awards
    Stock received upon Nonqualified Stock Option (NSO) exercise held greater than 1 year from exercise
  • Tax treatment upon vesting or exercise
    Ordinary income tax on the difference between the exercise price and the stock's FMV at exercise
  • Your charitable gift option
    Eliminate capital gain recognition on difference between cost basis and FMV at gift date
  • Potential tax benefits
    Deduction at FMV, up to 30% of your AGI, with 5-year carryover
  • Gift rating
    Good
  • Equity compensation awards
    Stock received upon Incentive Stock Option (ISO) exercise held greater than 1 year from exercise and 2+ years from grant§
  • Tax treatment upon vesting or exercise
    No ordinary income tax, although Alternative Minimum Tax (AMT) may apply
  • Your charitable gift option
    Eliminate capital gain recognition on difference between cost basis and FMV at gift date**
  • Potential tax benefits
    Deduction at FMV, up to 30% of your AGI, with 5-year carryover
  • Gift rating
    Good
  • Equity compensation awards
    Vested RSUs and RSAs held 1 year or less
  • Tax treatment upon vesting or exercise
    Ordinary income tax on difference between FMV at vesting and amount paid for your stock
  • Your charitable gift option
    No advantage to selling your stock and donating cash proceeds††
  • Potential tax benefits
    Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryover
  • Gift rating
    Good
  • Equity compensation awards
    Stock received upon NSO exercise held 1 year or less
  • Tax treatment upon vesting or exercise
    Ordinary income tax on difference between exercise price and your stock's FMV at exercise
  • Your charitable gift option
    No advantage to selling your stock and donating cash proceeds††
  • Potential tax benefits
    Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryover
  • Gift rating
    Good
  • Equity compensation awards
    Unvested RSUs and unexercised ISOs
  • Tax treatment upon vesting or exercise
    Not transferrable to charity
  • Your charitable gift option
    Not transferrable to charity
  • Potential tax benefits
    Not transferrable to charity
  • Gift rating
    Unacceptable
  • Equity compensation awards
    Unexercised NSOs
  • Tax treatment upon vesting or exercise
    Not applicable
  • Your charitable gift option
    Generally, not transferrable; exercise by charity may result in ordinary income tax to you
  • Potential tax benefits
    Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryover
  • Gift rating
    Unacceptable
  • Equity compensation awards
    Vested Performance Stock Units (PSUs) and Performance Stock Awards (PSAs) held greater than 1 year from vesting
  • Tax treatment upon vesting or exercise
    Ordinary income tax on difference between FMV at vesting and amount paid for your stock
  • Your charitable gift option
    Eliminate capital gain recognition on difference between cost basis and FMV at gift date
  • Potential tax benefits
    Deduction at FMV, up to 30% of your AGI, with 5-year carryover
  • Gift rating
    Ideal
  • Equity compensation awards
    Vested PSUs and PSAs held 1 year or less from vesting
  • Tax treatment upon vesting or exercise
    Ordinary income tax on difference between FMV at vesting and amount paid for your stock
  • Your charitable gift option
    No advantage to selling your stock and donating cash proceeds††
  • Potential tax benefits
    Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryover
  • Gift rating
    Good
  • Equity compensation awards
    Employee Stock Purchase Plans (ESPPs) Tax-qualified ESPPs held greater than 1 year from purchase and greater than 2 years from the grant
  • Tax treatment upon vesting or exercise
    No ordinary income tax, although you must meet holding period requirements prior to gifting or there may be income recapture
  • Your charitable gift option
    Eliminate capital gain recognition on difference between cost basis and FMV at gift date. Recognize ordinary income on the discount amount.
  • Potential tax benefits
    Deduction at FMV, up to 30% of your AGI, with 5-year carryover
  • Gift rating
    Moderate
  • Equity compensation awards
    Stock Appreciation Rights (SARs)
  • Tax treatment upon vesting or exercise
  • Your charitable gift option
    Generally, not transferrable; any transfer may result in adverse tax impact to you
  • Potential tax benefits
  • Gift rating
    Unacceptable

Case study: Charitable tax planning opportunity

Cheryl is a senior executive of TechCo, a technology company that recently went public. She has accumulated a significant amount of restricted stock from the vesting of RSUs that she has held for more than one year.

Cheryl is eager to plan for her family's future and charitable giving is a big part of her goals. In addition, she has always been charitably minded and will have an unusually high income this year, so a charitable gift could help her to minimize tax exposure.

After speaking with her financial advisor, Cheryl learns about how she can easily fund a donor-advised fund account to receive a current-year tax benefit while making more money available to charity over time.

Cheryl decides to fund a donor-advised fund account with $1 million of company stock, with a cost basis of $50,000. By donating $1 million of TechCo stock directly to charity, as shown in Option 2 below, Cheryl eliminates $190,000 in projected federal capital gains taxes and this money is instead available to grant to charities through her donor-advised fund. She also has an additional $260,300 in tax savings from her claimed income tax deduction.

This graphic illustrates how Cheryl can potentially eliminate $190,000 in projected federal capital gains taxes allowing for an additional $190,000 for a tax deduction and available to grant to charities.

For illustrative purposes only.