How to Calculate Cost or Adjusted Basis for Donated Property

To calculate the adjusted basis of property you plan to donate, start with what you paid for it (purchase price plus sales tax, commissions, and other acquisition costs), add the cost of any capital improvements, then subtract depreciation you claimed or were entitled to claim, casualty loss reimbursements, and certain tax credits. The final number is what the IRS will hold you to on Form 8283, and it either caps your deduction outright or, for long-held appreciated assets, sits behind the scenes as the figure you still have to be able to prove.

Basis matters because it sets the ceiling in more situations than people expect. For property held one year or less, or for anything that would have produced ordinary income if sold, your deduction cannot exceed your adjusted basis regardless of what the property is worth. Even when you qualify to deduct full fair market value, basis is still what you write on the form and what an auditor will ask you to substantiate.

Where Your Basis Starts

The starting figure depends entirely on how you got the property.

For property you bought, cost basis is the purchase price plus sales tax, brokerage commissions, and any other costs you paid to acquire it and get it ready for use. A share of stock purchased through a broker has a cost basis equal to the price paid plus the trading fee.

Inherited Property

Property you inherit generally takes a “stepped-up” basis equal to the fair market value on the date the previous owner died.¹ If the estate’s executor filed Form 706 and elected the alternate valuation date, you use that value instead.² Decades of appreciation effectively disappear from the tax picture. If your parent bought stock for $5,000 and it was worth $50,000 at death, your basis is $50,000.

For property held jointly with a spouse, only the deceased spouse’s half gets the step-up. If you and your spouse bought a home together for $200,000 and it was worth $600,000 when your spouse died, your new basis is $400,000: your original half ($100,000) plus the stepped-up half ($300,000).

Property Received as a Gift

When someone gives you property during their lifetime, the basis carries over from the donor. You take whatever adjusted basis the donor had.³ A special dual-basis rule applies when the fair market value at the time of the gift was lower than the donor’s basis, but that situation rarely matters in the charitable context because you would not be donating property worth less than your basis to claim a deduction.

Stock Bought in Multiple Lots

If you bought shares of the same stock at different times and prices and are donating only some of them, you have to identify which specific shares you are giving away. If you can identify the particular shares by purchase date, lot number, or confirmation, their specific cost is your basis.⁴ If you cannot, the IRS defaults to first-in, first-out: the oldest shares are treated as the ones donated. For mutual fund shares, you may be able to use an average cost method. The choice matters because donating shares with the lowest basis and longest holding period both maximizes your deduction and shelters the most appreciation from tax.

Adjustments That Change Your Basis Over Time

Your original cost almost never survives unchanged to the date of donation. The tax code requires specific increases and decreases as events occur during ownership.⁵

What Increases Basis

Capital improvements are the most common increase, especially for real estate. An improvement is an expenditure that adds value or substantially extends the property’s useful life: a new roof, a kitchen renovation, an added bathroom. The full cost gets added to your basis.⁴ Special assessments for public improvements like new sidewalks or sewer connections also increase basis.

Routine maintenance and repairs do not. Patching a leak in the roof is a repair. Replacing the entire roof is an improvement. The IRS scrutinizes the distinction closely. If the property was used in a business, repairs may already have been deducted as current expenses, which means they reduced your taxable income and cannot also increase your basis.

What Decreases Basis

Depreciation is the single largest source of reductions. If you used the property in a business or to produce rental income, the cumulative depreciation you claimed over the years has to be subtracted from your basis.⁶ This reduction is mandatory even if you forgot to claim depreciation on earlier returns. The IRS reduces your basis by the depreciation you were entitled to take, whether or not you actually took it.

Casualty and theft losses reduce basis too. If you received insurance proceeds for storm damage, your basis drops by the reimbursement amount plus any deductible loss you claimed.⁷ Even if you spent the insurance money on something else, the basis still decreases.

Tax credits for energy-efficient improvements catch people off guard. If you claimed the energy efficient home improvement credit for new insulation or a heat pump, the basis increase that would normally come from that expenditure gets reduced by the amount of the credit.⁸ The government gave you a credit in place of a basis increase.

Converted Property

A former personal residence converted to a rental has a wrinkle. Your depreciable basis is the lesser of the property’s adjusted basis or its fair market value on the date you converted it to rental use.⁹ If the market had dropped after you bought the home, your depreciable basis starts at the lower market value rather than your purchase price. When you later donate the property, all the depreciation claimed since conversion still comes off that already-reduced starting point.

How Basis Controls Your Charitable Deduction

Once you know your adjusted basis, the next question is whether you can deduct the property’s full fair market value or only that basis figure. The answer turns on a single classification: is the donated property “ordinary income property” or “capital gain property”?

Ordinary Income Property

If selling the property at fair market value on the donation date would have produced ordinary income or short-term capital gain, the IRS treats it as ordinary income property. That includes business inventory, artwork created by the donor, and any capital asset held for one year or less.¹⁰

For ordinary income property, the deduction is reduced by the amount that would have been ordinary income or short-term gain. In practice, that usually limits your deduction to your adjusted basis. Buy stock for $1,000, donate it eight months later when it is worth $1,500, and your deduction is $1,000. The $500 of appreciation vanishes as a tax benefit.

Capital Gain Property

Assets that would have produced a long-term capital gain if sold qualify as capital gain property. The threshold: you held it for more than one year.¹⁰ The advantage of donating capital gain property is that the deduction generally equals full fair market value, not just basis. You skip paying tax on the appreciation and still deduct the entire appreciated amount.

Two exceptions drop the deduction back to basis even for capital gain property. First, if you donate tangible personal property (a painting, a piece of equipment, a musical instrument) and the charity’s use of it is unrelated to its tax-exempt purpose, the deduction is reduced to basis.¹¹ Giving an appreciated painting to a hospital that hangs it in a hallway rather than displaying it in a museum collection triggers this rule. Second, donations to most private foundations are also limited to basis.

Depreciation Recapture

When you donate depreciable property that has appreciated, the deduction must account for depreciation you previously claimed. The portion of gain attributable to depreciation recapture is treated as ordinary income, which reduces the deductible amount.¹¹ You cannot donate property to avoid recapture while also deducting the full appreciated value. The math nets out so the prior tax benefit from depreciation is effectively recaptured.

Bargain Sales and Property With Debt on It

A bargain sale happens when you sell property to a charity for less than fair market value. The IRS treats it as part sale, part donation, and your adjusted basis has to be split between the two.¹⁰

The allocation formula: multiply your total adjusted basis by a fraction whose numerator is the sale price and whose denominator is the fair market value. Say you have property with a $10,000 basis and $20,000 fair market value, and you sell it to a charity for $8,000. The basis allocated to the sale is $10,000 × ($8,000 ÷ $20,000) = $4,000. You recognize a $4,000 gain on the sale ($8,000 minus $4,000). The remaining $6,000 of basis belongs to the donated portion, and your charitable deduction equals the fair market value of that donated portion ($12,000), subject to the usual rules for the property type.

Property subject to debt gets the same treatment even if you receive no cash. When a charity takes over your mortgage, the outstanding loan balance is treated as the sale price for the allocation formula.¹⁰ If the debt exceeds the allocated basis, you owe tax on the gain. People donating encumbered real estate to charity are sometimes hit with a tax bill they did not expect.

Basis Rules That Change by Property Type

Vehicles, Boats, and Aircraft

Donated vehicles worth more than $500 follow their own rules that largely override the normal basis-versus-FMV analysis. If the charity sells the vehicle without significant use or material improvement, your deduction is limited to the gross proceeds from that sale, regardless of basis or market value.¹² The charity must provide Form 1098-C showing what it received.¹³

You can deduct fair market value only if the charity uses the vehicle in a meaningful way (delivering meals, for example), makes substantial repairs that significantly increase its value, or gives or sells it at a steep discount to someone in need.¹² For vehicles worth $500 or less, normal rules apply and the deduction is the lesser of fair market value or $500.

Intellectual Property

Donating a patent, copyright, trademark, trade secret, or software limits your initial deduction to the lesser of basis or fair market value. Appreciation is not deductible up front the way it would be for other capital gain property.¹⁰ An unusual additional deduction may be available in later years based on the income the charity actually earns from the property. The sliding scale starts at 100% of that income in years one and two, then decreases by 10 percentage points each year until it reaches 10% in years eleven and twelve. You have to notify the charity at the time of donation that you intend to claim these additional deductions, and the charity must file Form 8899 reporting the income.

Cryptocurrency and Other Digital Assets

The IRS treats digital assets as property, not currency, so standard basis rules apply.¹⁴ Your basis in cryptocurrency is typically what you paid in U.S. dollars when you acquired it, including transaction fees. Hold the crypto more than a year and donate it to a public charity, and you can generally deduct full fair market value while avoiding the capital gain.

Unlike publicly traded securities, cryptocurrency donations exceeding $5,000 require a qualified appraisal.¹⁵ Finding a qualified appraiser can be difficult because the appraiser must have verifiable education and experience valuing that specific type of property. Starting in 2026, brokers are required to report basis on certain digital asset transactions, which should make tracking somewhat easier.¹⁴

Inventory

Business inventory is ordinary income property by definition. The deduction is limited to the lesser of fair market value or your basis, which in practice means your cost of goods sold. You cannot turn unsold merchandise into a tax windfall by donating it at retail value.

Reconstructing Basis When Your Records Are Gone

Missing records do not automatically mean zero basis and a forfeited deduction, but the burden is squarely on you to rebuild the number. The IRS expects taxpayers to keep records of every item that affects basis.⁴ When those records are gone, alternative documentation has to do the work.

For stock, brokerage firms often retain historical cost basis data, and transfer agents may have records of original purchase prices. For real estate, closing statements, title company records, county recorder offices, and old mortgage documents can establish the purchase price. Improvement costs can sometimes be reconstructed through building permits, contractor invoices, or county assessment records showing when property values jumped.

Courts have allowed reasonable estimates of basis when a taxpayer can show some factual foundation for the figure, even without perfect records. Estimates carry obvious audit risk. The less documentation you have, the more likely the IRS is to challenge the deduction. For high-value property with incomplete records, professional help reconstructing basis before filing is generally worth the cost.

Reporting Basis on Form 8283 and the Penalty for Getting It Wrong

The paperwork the IRS demands scales directly with the value of what you donate. Miss the right form and the deduction can be disallowed entirely, even if your calculation was correct.

Written Acknowledgment

Any single contribution of $250 or more requires a contemporaneous written acknowledgment from the charity. It must state the amount of cash or a description of the property, whether the charity provided any goods or services in return, and a good faith estimate of their value if so.¹¹ “Contemporaneous” means you must have it in hand by the earlier of the date you file or the filing deadline including extensions.

Form 8283 Section A

Non-cash contributions totaling more than $500 require Form 8283 attached to your return.¹⁶ For items or groups of similar items valued between $500 and $5,000, you complete Section A. The form asks for the date you acquired the property, how you acquired it, your adjusted basis, and the fair market value. The charity does not need to sign Section A.

Form 8283 Section B and the Appraisal Requirement

When a single item or group of similar items exceeds $5,000 in claimed value, you have to complete Section B and attach a qualified appraisal.¹⁶¹⁷

Publicly traded securities are exempt from the appraisal requirement even above $5,000.¹⁰ You still report them on Section B when they clear the threshold, and you still need an accurate adjusted basis figure, but no appraiser is needed. The exception does not extend to cryptocurrency, closely held stock, or other assets that lack a readily available public market price.

Penalties for Overstating Basis or Value

A substantial valuation misstatement occurs when the claimed value or basis is 200% or more of the correct amount. The penalty is 20% of the resulting tax underpayment.¹⁸¹⁹ A gross valuation misstatement, where the claimed amount is 400% or more of the correct value, doubles the penalty to 40%. Neither applies unless the underpayment attributable to the misstatement exceeds $5,000.²⁰

A reasonable cause defense may protect you from the 20% penalty for a substantial misstatement if you obtained a qualified appraisal from a qualified appraiser and made a good faith investigation of the property’s value.²¹ That defense disappears entirely for a gross valuation misstatement involving charitable deduction property. At the 400% level, no amount of good faith saves you.

1
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
2
Internal Revenue Service. Gifts and Inheritances
3
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
4
Internal Revenue Service. Publication 551 – Basis of Assets
5
Office of the Law Revision Counsel. 26 U.S. Code 1016 – Adjustments to Basis
6
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
7
Internal Revenue Service. Publication 547 – Casualties, Disasters, and Thefts
8
Office of the Law Revision Counsel. 26 U.S. Code 25C – Energy Efficient Home Improvement Credit
9
Internal Revenue Service. Publication 527 – Residential Rental Property
10
Internal Revenue Service. Publication 526 – Charitable Contributions
11
Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, Etc., Contributions and Gifts
12
Internal Revenue Service. IRS Guidance Explains Rules for Vehicle Donations
13
Internal Revenue Service. Form 1098-C
14
Internal Revenue Service. Digital Assets
15
Internal Revenue Service. Qualified Appraisal Requirement for Charitable Contributions of Cryptocurrency
16
Internal Revenue Service. Instructions for Form 8283
17
Internal Revenue Service. Publication 561 – Determining the Value of Donated Property
18
eCFR. 26 CFR 1.6662-5 – Substantial and Gross Valuation Misstatements Under Chapter 1
19
eCFR. 26 CFR 1.6662-2 – Accuracy-Related Penalty
20
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
21
Internal Revenue Service. Return Related Penalties