In February 2022, it was widely reported that Elon Musk had donated 5 million shares of Tesla Inc. worth $5.7 billion to an unnamed nonprofit at the end of 2021, during the same period in which he sold $16 billion worth of Tesla stock. The oversized stock giveaway has garnered 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 non-cash donations up to 30% of adjustable gross income. As Musk sold over $16 billion worth of stock in 2021, it looks like he’s donated exactly 30% of his AGI for the year.
Nonprofits hailed the gesture in the hope that other billionaires would follow. Meanwhile, cynics have complained about tax loopholes that favor the wealthy. I’m afraid both sides are missing the biggest point.
For context, charitable donations offer a major advantage over cash donations. When you donate appreciated stocks that have been held for more than 12 months, you can legally avoid paying capital gains tax, both federal and state, as well as net investment income tax. 3.8%, or NII. As with cash donations, you can also deduct the fair market value of the stock. This makes stocks much more attractive than cash as a currency to support nonprofits.
Musk’s $5.7 billion stock donation 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 calculations:
- It’s safe to assume that the 5 million shares were initially granted to Musk at little or no cost. To maximize tax benefits, he would have donated shares at the lowest cost.
- The overall capital gains tax rate would have been approximately 36.1%, consisting of 20% federal tax, 3.8% NII tax, and 12.3% state tax. State of California. 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% California state tax), he could have saved An additional $2.81 billion through the Itemized Charitable Deduction ($5.7 billion x 49.3%).
- Together, he could have realized $4.58 billion in tax savings, or about 80% of the value of the gift.
It is true that $4.6 billion is an unusually large tax advantage for one person, and some may complain about the “loophole”. But it’s worth pointing out that tax laws are meant to incentivize the private sector (rather than the government) to fund charitable causes, and that one-time donation can have a generational impact. Tax-efficient charitable giving is the cornerstone of nonprofit organizations. And as Musk demonstrated, stock gifts offer unparalleled benefits over cash or credit card gifts.
Stock donations aren’t just for the ultra-rich
While Musk’s stock giveaway has received national news due to its size and fame, its contribution serves a larger purpose by illuminating what’s possible. Unlike offshore accounts, 1031 exchanges and other tax havens, the benefits of charitable donations aren’t just for the wealthy.
Whether you give $50 million or $50 million, the benefits are the same for all donors. When you donate shares, you can avoid capital gains and NII taxes while deducting the market value of the shares.
It’s also a boon for nonprofits, because pre-tax stock donations are typically much larger than cash, check, or credit card donations. Some have called it a transfer of wealth from the IRS to nonprofits because the charity or school can keep (tax-free) what you would have paid in taxes if you had sold the stock and donated the after-tax proceeds.
The potential for charitable donations is enormous. If each investor donated $2,500 in appreciated stock, $150 billion in new funds would flow into nonprofit bank accounts. Stock has the potential to grow the $300 billion individual giving market by 50%. With this in mind, we would like to point out that it is financially irresponsible to give away money when you own appreciated stocks.
Donating stock used to be a long and cumbersome process for donors and nonprofit organizations. Fortunately, this is no longer the case. New solutions like DonateStock have removed friction to make stock donations fast, safe, and free for all donors.
I hope Musk’s generous donation and the controversy surrounding it illuminate the enormous benefits of donating appreciated stocks. So before whipping 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 stocks this year.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Steve Latham is the founder and president 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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