Cost Basis of Donated Stock: Deduction Limits and Documentation

The cost basis of donated stock is what you originally paid for the shares, adjusted for reinvested dividends, splits, commissions, and similar events. It matters because it determines whether your charitable deduction equals the stock’s full fair market value or gets cut down to what you paid. For stock you’ve held more than a year and give to a qualified public charity, you deduct the fair market value on the donation date and skip the capital gains tax on the appreciation. For stock held a year or less, the deduction is effectively limited to your basis.

The Two Numbers That Decide Your Deduction

Every stock donation involves two figures: your cost basis and the fair market value (FMV) on the day the charity takes ownership. Basis is what you invested, purchase price plus any commissions or fees. FMV is what the shares are worth on the open market that day. The difference between them is your unrealized gain, and the IRS’s treatment of that gain turns entirely on your holding period.¹

Held longer than a year, the shares are long-term capital gain property, and you deduct FMV. Held a year or less, they’re short-term, and the deduction gets reduced by the amount of gain that would have been short-term capital gain if you had sold. That reduction wipes out the appreciation and leaves you with a deduction equal to basis.

Long-Term Stock: Full Market Value, but You Still Need Basis

Donating stock held for more than one year to a public charity lets you deduct the FMV on the gift date and completely bypass the capital gains tax you would have owed on a sale.²³

Cost basis doesn’t set the deduction amount in this case, but the IRS still expects you to report it. Form 8283 asks for your basis, the acquisition date, and the FMV, and the acquisition date is what proves you cleared the one-year threshold. If you can’t document the purchase date, you can lose the FMV treatment and get pushed back to a basis-only deduction.

Short-Term Stock: Deduction Capped at What You Paid

Stock held one year or less gets far worse treatment. The deduction must be reduced by the gain that would not have been long-term capital gain on a sale.¹ Because all of the appreciation on short-term stock would have been short-term gain, the whole appreciation gets stripped out and your deduction equals your basis.

The practical result: donating short-term appreciated stock delivers no tax advantage over selling it and giving the cash. If you’re close to the one-year mark on shares you plan to give, waiting a few weeks can turn a basis-only deduction into a full-FMV deduction.

Choosing Which Shares to Donate

When you’ve bought the same stock at different times and prices, you need a method for identifying the shares you’re giving away. The IRS default is first-in, first-out, which treats the oldest shares as the ones donated.⁴

You can override that default by using specific identification. This lets you pick the lot with the lowest basis and the longest holding period, which maximizes the gain you avoid and confirms long-term status. To use it, designate the shares in writing through your broker before the transfer, and keep the confirmation. Without a written designation before the fact, you’re stuck with FIFO.

Inherited Stock: Stepped-Up Basis

Inherited shares don’t carry the deceased owner’s original basis. Instead, your basis is the stock’s FMV on the date of death.⁵ Stock a parent bought for $10,000 decades ago and worth $200,000 the day they died has a basis of $200,000 in your hands. The prior appreciation disappears for income tax purposes.

An executor can elect an alternate valuation date six months after death, but only if it reduces both the gross estate and the estate tax, and the election is irrevocable.⁶

Inherited stock also gets an automatic long-term holding period, no matter how briefly anyone actually held it.⁷ So a donation qualifies for the FMV deduction. The catch is that with basis already stepped up, there may be little appreciation left to shelter. The strategy pays off when the stock has continued to rise well beyond the date-of-death value.

Gifted Stock: Carryover Basis

Stock given to you during the donor’s lifetime works differently. You inherit the donor’s original cost basis, called carryover basis, along with their holding period.⁸ Shares an aunt bought for $3,000 in 1990 and gave you in 2024 have a $3,000 basis in your hands and already count as long-term.

A dual-basis rule applies when the FMV on the gift date is below the donor’s basis: for loss purposes, your basis is the lower FMV. For charitable donation purposes, though, you use the donor’s original basis. If someone gifts you stock intending you to donate it, get their purchase records. Reconstruction after the fact is slow and unreliable.

Corporate Actions That Change Your Per-Share Basis

Splits, stock dividends, and spin-offs change your share count without changing your total investment, and your basis redistributes across the new shares. A two-for-one split doubles your shares and halves the per-share basis; total basis is unchanged. A stock dividend spreads your original basis across the larger count. In a spin-off, basis is allocated between the parent and the new company, usually by relative FMV right after the spin-off. Brokerage statements typically track these adjustments.

Getting this wrong is one of the easier ways to accidentally overstate a deduction. Always work from the current adjusted basis, not the pre-split number on an old confirmation.

AGI Limits and the Five-Year Carryover

Even a fully qualifying FMV deduction is capped at a percentage of your adjusted gross income. Capital gain property given to a public charity is limited to 30% of AGI. Gifts to private non-operating foundations are limited to 20%.¹

Anything over the limit carries forward for up to five years, taken in order starting with the oldest. Whatever remains unused after five years is lost.

Documentation the IRS Expects

Missing paperwork can cost you the deduction entirely, even when the underlying gift is legitimate.

Written Acknowledgment From the Charity

For any single contribution of $250 or more, you need a written acknowledgment from the charity by the earlier of your filing date or the return’s due date, including extensions. It must name the organization, describe the donated property (without stating a dollar value), and disclose whether you received anything in return.⁹¹⁰

Form 8283 for Noncash Donations

File Form 8283 if the total deduction for a noncash contribution (or a group of similar items) tops $500. Section A covers items valued at $5,000 or less and publicly traded securities regardless of value. Section B covers items above $5,000 and generally requires a qualified appraisal, though publicly traded securities are exempt from the appraisal rule even above $5,000.¹¹

Section A asks for cost basis, the acquisition date, and the FMV on the donation date. Section B also requires the charity’s signature. Keep your broker statements and trade confirmations for each donated lot; those documents are what substantiate basis and holding period if the IRS asks.

Non-Publicly Traded Stock Over $5,000

Shares in a private company or other non-publicly traded stock worth more than $5,000 require a written qualified appraisal from a qualified appraiser and completion of Section B of Form 8283.¹¹ Skipping the appraisal is one of the most common reasons the IRS disallows these deductions. Restricted stock and shares in closely held companies may also warrant a discount for lack of marketability, which brings FMV below what comparable freely traded shares would fetch.¹²

Overvaluation Penalties

Overstating value on a stock donation carries real financial consequences. If your claimed value is 150% or more of the correct value, the IRS imposes a 20% accuracy-related penalty on the resulting underpayment. At 200% or more, the penalty doubles to 40%.¹³

These penalties tend to hit non-publicly traded stock hardest because valuation there involves judgment. For publicly traded shares, the safeguards are simpler: use the correct method for FMV on the donation date, work from the current basis after any splits or spin-offs, and keep records that show the purchase date and price for the specific lot you gave. Accurate basis is the foundation of an accurate deduction, and it’s what stands up if the return is questioned later.

1
Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, etc., Contributions and Gifts
2
Internal Revenue Service. Topic No. 409 Capital Gains and Losses
3
Internal Revenue Service. Publication 526, Charitable Contributions
4
Internal Revenue Service. Stocks (Options, Splits, Traders)
5
Internal Revenue Service. Gifts and Inheritances
6
Office of the Law Revision Counsel. 26 U.S. Code 2032 – Alternate Valuation
7
Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property
8
Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
9
Internal Revenue Service. Charitable Contributions – Written Acknowledgments
10
Internal Revenue Service. Charitable Organizations – Substantiation and Disclosure Requirements
11
Internal Revenue Service. Instructions for Form 8283
12
Internal Revenue Service. Publication 561, Determining the Value of Donated Property
13
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments