Yes, a nonprofit can invest in stocks. A 501(c)(3) is generally permitted to hold publicly traded stocks, mutual funds, ETFs, and other securities, and most of the income those investments produce is exempt from federal tax. What makes nonprofit investing different from personal investing is the layer of rules sitting on top: the board owes a fiduciary duty under state law, certain kinds of investment activity trigger the Unrelated Business Income Tax, and private foundations face an additional set of federal restrictions that public charities do not.
A charity that leaves its entire reserve in a low-interest checking account is not being safe. It is losing ground to inflation and reducing what it can spend on its mission. The question is not whether to invest, but how to invest in a way that satisfies the legal standards that apply to charitable money.
The Board’s Fiduciary Duty
Every investment decision a nonprofit makes runs through its board of directors or trustees, and every board member owes the organization a fiduciary duty. The governing framework in almost every state is the Uniform Prudent Management of Institutional Funds Act, or UPMIFA, adopted in 49 states.
UPMIFA judges the portfolio as a whole rather than picking apart individual holdings. When the board makes investment decisions, it must weigh the fund’s intended duration, the organization’s charitable purpose, general economic conditions, and expected total return from both income and appreciation. Diversification is required unless the board documents a specific reason to concentrate.
The standard is process, not outcome. A board that followed a sound, documented process and lost money on a position is in a far stronger legal posture than a board that made money through speculation without records. Board members who skip documentation expose themselves personally to breach-of-duty claims even when the portfolio does well.
Hiring an Investment Manager
Most boards do not manage the portfolio directly, and UPMIFA expects that. The board can delegate investment management to an outside advisor if it uses reasonable care in selecting the advisor, defines the scope of the delegation clearly, and reviews the advisor’s performance periodically. The delegation should be captured in a written investment management agreement covering authority, fees, reporting, and the obligation to follow the organization’s investment policy.
Hiring an advisor does not end the board’s responsibility. Monitoring continues, and fees must be reasonable for the services provided.
Writing Down the Policy
An Investment Policy Statement is the internal document that turns the board’s duty into concrete rules for whoever is managing the money. A workable IPS states the fund’s objective, the organization’s risk tolerance, target ranges for equities, fixed income, and cash, any prohibited activities such as short selling or leverage, the benchmarks used to evaluate the manager, and a review schedule. Without a written policy, the organization has no documented framework, which is the first thing a regulator or disgruntled donor will look for.
How the IRS Taxes a Nonprofit’s Investment Income
The biggest tax advantage a nonprofit has as an investor is that ordinary portfolio income is federally tax-free. Dividends, interest, capital gains from selling securities, and royalties are all specifically excluded from unrelated business taxable income under IRC Section 512(b).1Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income A 501(c)(3) can hold a diversified stock portfolio, collect dividends, and sell appreciated positions without owing federal income tax on any of it, provided the activity stays passive.
When Investment Income Becomes Taxable (UBIT)
The exemption falls away when investment activity looks like a business rather than passive investing. Two situations catch nonprofits most often.
The first is debt-financed investing. If a nonprofit borrows to buy securities, including buying stock on margin, income from those securities becomes partially taxable. The taxable share equals the ratio of the average debt on the property to the average adjusted basis of the property. So if a nonprofit uses $40,000 of borrowed funds to acquire a $100,000 position, 40% of the dividends and gains from that holding are subject to UBIT.2Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income The rationale is that the nonprofit is using its tax exemption to compete with taxable investors who must service debt with after-tax dollars.
The second is trading activity that resembles a securities dealer rather than a passive investor. Volume, frequency, and staff time devoted to trading can push activity across the line, and speculative day trading is the kind of pattern that gets flagged. There is no bright-line test.
UBIT is reported on Form 990-T and taxed at the corporate rate of 21% for most exempt organizations, with trusts taxed at trust rates.3Internal Revenue Service. Unrelated Business Income Tax Returns Organizations get a $1,000 specific deduction against unrelated business taxable income, so small amounts often produce no tax.1Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income The 990-T filing obligation kicks in once gross unrelated business income reaches $1,000.
Extra Rules for Private Foundations
Everything above applies to all 501(c)(3) organizations. Private foundations face a further layer of federal investment restrictions. If a charity draws most of its funding from a single source or a small group of donors rather than broad public support, it is likely a private foundation, and these rules matter.
No Self-Dealing With Insiders
IRC Section 4941 prohibits nearly any financial transaction between a private foundation and its disqualified persons, a category that includes substantial contributors, foundation managers, and their family members. Selling stock to the foundation, lending it money, or leasing property from it are all banned, even on terms favorable to the foundation. The initial excise tax is 10% of the amount involved on the disqualified person for each year the violation is uncorrected, with a foundation manager who knowingly participated owing 5%. If the transaction is not corrected within the taxable period, an additional 200% tax applies to the disqualified person.4Office of the Law Revision Counsel. 26 USC 4941 – Taxes on Self-Dealing
No Jeopardizing Investments
IRC Section 4944 imposes a 10% excise tax on any amount a private foundation invests in a way that jeopardizes its ability to carry out its exempt purposes.5Office of the Law Revision Counsel. 26 USC 4944 – Taxes on Investments Which Jeopardize Charitable Purpose A foundation manager who approved the investment knowing it was jeopardizing owes a separate 5%. Putting 90% of an endowment into a single volatile micro-cap stock is the kind of decision that invites the penalty. The standard is whether managers exercised ordinary business care and prudence given the foundation’s short- and long-term financial needs.
Program-related investments are carved out. If the primary purpose is to advance the foundation’s charitable mission rather than to generate a financial return, the investment is not treated as jeopardizing even if it carries significant risk.5Office of the Law Revision Counsel. 26 USC 4944 – Taxes on Investments Which Jeopardize Charitable Purpose A below-market loan to a nonprofit affordable housing developer is a classic example.
Limits on Owning a Business (Excess Holdings)
IRC Section 4943 limits how much of a for-profit company a private foundation and its disqualified persons can collectively own. The general rule is that their combined voting stock in any incorporated business cannot exceed 20%. Where the foundation and insiders together own 20% or less and a third party maintains effective control, the limit rises to 35%.6GovInfo. 26 USC 4943 – Taxes on Excess Business Holdings Holdings of 2% or less of both the voting stock and total value of outstanding shares are treated as too small to trigger the rule at all.7Internal Revenue Service. IRC Section 4943 – Taxes on Excess Business Holdings
Violations bring an initial tax of 10% of the value of the excess holdings for each year in the taxable period, escalating to 200% if the foundation still holds the excess at the end of that period.6GovInfo. 26 USC 4943 – Taxes on Excess Business Holdings A diversified portfolio of publicly traded stocks rarely triggers this rule. It usually comes up when a foundation receives a large concentrated block through a donation or bequest.
The 5% Payout Requirement
Private foundations must distribute at least 5% of the fair market value of their non-charitable-use assets each year as qualifying distributions, which include grants to charities, program-related investments, and reasonable administrative expenses tied to charitable activities. Falling short brings a 30% excise tax on the undistributed amount, with an additional 100% tax if the shortfall is not corrected in the applicable period. Excess distributions can be carried forward for up to five tax years.
The payout rule shapes investment strategy. The portfolio has to earn enough to cover 5% every year and still keep pace with inflation, which means a foundation invested too conservatively can slowly bleed its endowment.
Watch the Investment Income Ratio
Public charities classified under IRC Section 509(a)(2) need to keep an eye on how much of their total support comes from investment returns. To maintain that classification, investment income must stay below one-third of total support, measured on a rolling five-year basis. Investment income for this purpose includes gross investment income and unrelated business income. A charity whose returns grow disproportionately large compared to program revenue and donations can be reclassified as a private foundation, which pulls all the private-foundation rules above into play.
Organizations under 509(a)(1) face a different public support test focused on donations and government grants, but the underlying concern is the same. The board should monitor the ratio annually, not just when the five-year test comes due.
Investing According to the Mission
Nonprofits often want their portfolios to reflect their values. A health charity may divest from tobacco. An environmental group may screen out fossil fuel companies. The legal question is whether considering non-financial factors conflicts with the duty to manage the portfolio prudently.
The IRS addressed this in Notice 2015-62. Private foundation managers may consider the relationship between an investment and the foundation’s charitable purposes when making decisions, and they are not required to pick only the investments with the highest expected returns, the lowest risks, or the greatest liquidity.8Internal Revenue Service. Notice 2015-62 – Investments Made for Charitable Purposes A foundation will not face excise tax under the jeopardizing investment rules for choosing an investment that furthers its charitable mission, even if the expected return is lower than a mission-neutral alternative, as long as managers exercise ordinary business care and prudence.
The IRS noted this aligns with UPMIFA, which allows consideration of an asset’s special relationship or value to the organization’s charitable purposes.8Internal Revenue Service. Notice 2015-62 – Investments Made for Charitable Purposes Mission-aligned investing is legally permissible. The place boards get into trouble is not the decision itself but skipping the documentation of why the chosen approach serves both the financial needs and the charitable goals of the organization.
Reporting Investment Income
Nonprofits report investment income on IRS Form 990. Dividends, interest, and gains or losses from securities sales appear in Part VIII of the return.9Internal Revenue Service. 2025 Instructions for Form 990 Organizations with endowment funds add detail on Schedule D, including beginning and ending balances, contributions, earnings, and distributions.
These filings are public. Every exempt organization must make its annual Form 990 available for inspection, either on request or by posting it online, and the return with all attached schedules must remain accessible for three years from the filing due date or the actual filing date, whichever is later.10Internal Revenue Service. Public Disclosure and Availability of Exempt Organization Returns and Applications Non-private foundations do not have to disclose donor names and addresses, but the details of the investment portfolio are visible to anyone who looks.
An organization with UBIT files Form 990-T as well, due for most exempt organizations by the 15th day of the fifth month after the end of the tax year.3Internal Revenue Service. Unrelated Business Income Tax Returns Between public disclosure and IRS reporting, a nonprofit’s investment activity is more transparent than a for-profit corporation’s, and boards that understand this from the start make better decisions about what to own and how to explain it.