In February 2022, it was widely reported that Elon Musk donated 5 million shares of Tesla Inc. worth $5.7 billion to an unnamed nonprofit in late 2021, during the same time in which he sold $16 billion in Tesla stock. The outsized stock gift generated a lot of attention from different corners.
While Musk moved to Texas before the sale, California taxes income and gains based on when they were earned as a California resident. The IRS allows you to deduct noncash gifts of up to 30% of adjustable gross income. As Musk sold more than $16 billion in stock in 2021, it appears he donated exactly 30% of his AGI for the year.
Nonprofits lauded the gesture with the hope other billionaires would follow suit. Meanwhile, cynics groused about the tax loopholes that favor the wealthy. I worry both sides are missing the bigger point.
For context, charitable stock gifting offers one major advantage over cash gifts. When you donate appreciated stock that has been held for more than 12 months, you can legally avoid paying capital gains tax—both federal and state—as well the 3.8% net investment income, or NII, tax. As with cash gifts, you may also deduct the fair market value of the stock. This makes stock much more attractive than cash as a currency for supporting nonprofits.
Musk’s $5.7 billion stock gift will do a lot of good. At the same time, it’s worth pointing out that Musk may have saved up to $4.6 billion in taxes.
Here are the assumptions and the math:
- It’s safe to assume the 5 million shares were originally granted to Musk at little or no cost. To maximizing the tax benefits, he would have donated shares with the lowest cost basis.
- The all-in capital gains tax rate would have been about 36.1%, comprised of 20% federal tax, 3.8% NII tax, and 12.3% California state tax. This implies possible savings of $1.77 billion in capital gains and NII tax ($5.7 billion x 36.1%).
- Assuming his personal income tax rate was near the top of the scale at 49.3% (37% federal + 12.3% CA state tax), he could have saved another $2.81 billion from the itemized charitable deduction ($5.7 billion x 49.3%).
- Combined, he could have realized $4.58 billion in tax savings, or roughly 80% of the value of the gift.
It’s true that $4.6 billion is an unusually high tax benefit for one person to receive, and some may complain about “the loophole.” But it’s worth pointing out that the tax laws are intended to incentivize the private sector (rather than the government) to fund charitable causes, and this one gift can have a generational impact. Tax-advantaged charitable giving is the lifeblood of nonprofits. And as Musk demonstrated, stock gifting offers unparalleled benefits compared to cash or credit card gifts.
Stock Gifting Is Not Just for the Ultra-Wealthy
While Musk’s stock gift received national news because of its size and his celebrity, his contribution serves a bigger purpose in illuminating what is possible. Unlike with offshore accounts, 1031 exchanges and other tax havens, the benefits of charitable stock gifting are not reserved for the wealthy.
Whether you’re donating $50 or $50 million, the advantages are the same for all donors. When you donate stock, you can avoid capital gains and NII taxes while deducting the market value of stock.
It’s also a boon for nonprofits, as pre-tax stock gifts are generally much larger than gifts of cash, check, or credit card. Some have called it a transfer of wealth from the IRS to the nonprofits, as the charity or school gets to keep (tax-free) what you would have paid in tax had you sold the stock and donated the after-tax proceeds.
The potential for charitable stock gifting is enormous. If every investor donated $2,500 in appreciated stock, $150 billion in new funding would flow into nonprofit bank accounts. Stock has the potential to grow the $300 billion individual giving market by 50%. In this light, we like to point out that it’s financially irresponsible to donate cash when you own appreciated stock.
Stock gifting used to be a painstaking, time-consuming process for donors and nonprofits. Fortunately, this no longer the case. New solutions such as DonateStock have removed the friction to make stock giving fast, safe, and free for all donors.
My hope is that Musk’s generous gift and the controversy that surrounds it will illuminate the enormous advantages of donating appreciated stock. So before you pull out your credit card to support your local school or YMCA, ask yourself: “What would Elon do?” Be like Elon Musk—give smart and save more by donating stock this year.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Steve Latham is the founder and chairman of DonateStock. He has three decades of experience in starting and growing innovative technology companies in finance, marketing, and data analytics.
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