Understanding cost basis for stock donations
Understanding cost basis for stock donations
Summary: Your cost basis is the amount you use to calculate capital gains or losses. For charitable donations, it determines how much you can deduct on your taxes.
Key IRS references for this article: Publication 526 (charitable contributions), Publication 551 (basis of assets), Publication 525 (compensation income), Publication 561 (valuations), and the Form 8283 instructions.
Why cost basis matters
According to Publication 526, when you donate stock, the IRS needs to know your cost basis to verify your deduction amount. Publication 551 explains how that basis is determined.
- Long-term holdings (held more than 1 year): You can generally deduct the full fair market value, subject to AGI limits.
- Short-term holdings (held 1 year or less): Your deduction is generally limited to your cost basis, even if the stock is worth more.
Example:
- You bought stock for $1,000 (cost basis)
- Now worth $5,000 (fair market value)
- If held > 1 year: Deduct up to $5,000 ✅
- If held ≤ 1 year: Deduct up to $1,000 ⚠️
How to find your cost basis
Your cost basis depends on how you acquired the stock (Publication 551 lays out the detailed rules):
1. Purchased stock
Cost basis = Purchase price + any commissions.
Where to find it:
- Brokerage account statements
- Original purchase confirmation
- Form 1099-B (sent by broker at tax time)
2. Gift (someone gave you stock)
Cost basis = What the donor originally paid (carryover basis)
If the stock declined in value after the donor bought it, the IRS has "dual basis" rules. Those mostly matter when you sell at a loss. For appreciated stock that you're donating, the donor's basis generally applies.
When someone gives you stock as a gift, you generally "inherit" their cost basis. If they bought the stock for $1,000, that's your cost basis too, even if it's worth $10,000 now.
Example:
- Your parents bought the stock for $2,000
- They gifted it to you when worth $8,000
- Your cost basis = $2,000 (what they paid)
Where to find it:
- Ask the person who gave you the stock
- Their original purchase records or brokerage statements
- Gift tax return (Form 709) if they filed one
Note: According to IRS rules, if the stock lost value, there are special rules. For most charitable donations of gifted stock that has appreciated, you use the donor's original cost basis.
3. Inheritance
Cost basis = Fair market value on the date of death (stepped-up basis).
According to IRS rules, this "step-up" in basis is generally favorable for appreciated stocks.
Where to find it:
- Estate documentation
- Appraisal from date of death
- Executor or estate attorney can provide this
4. Stock options (ISOs or NSOs)
NSOs (Non-Qualified Stock Options) – the common case: Cost basis = Strike price + the income reported on your W-2. The “spread” at exercise is ordinary income; once it’s on your W-2 it becomes part of your basis.
When you exercise NSOs, the gain is taxed as ordinary income and shows up on your W-2. That amount becomes part of your cost basis.
Example:
- Strike price: $10/share
- FMV at exercise: $50/share
- You exercised 100 shares
- W-2 income: $4,000 (100 × ($50 - $10))
- Your cost basis = $1,000 (strike price) + $4,000 (W-2 income) = $5,000 total
ISOs (Incentive Stock Options) - these are more complex: ISO exercises aren't taxable for regular tax if you meet the holding periods, but the spread may be an AMT adjustment (which gives you a higher AMT basis). If you donate before holding the shares at least one year from exercise and two years from the grant date, it's a disqualifying disposition. Consider consulting a tax professional before donating ISO shares.
Where to find it:
- Your W-2 (year of exercise) - look for the income amount
- Stock option exercise confirmation from your broker
- Equity compensation statements from employer
- Form 3921 (for ISOs) - sent by employer
5. ESPP (Employee Stock Purchase Plan)
Cost basis = What you paid + any discount treated as ordinary income.
ESPPs let you buy company stock at a discount (often 15%). Your basis depends on how long you hold the shares:
- Qualifying disposition (held ≥1 year after purchase AND ≥2 years after offering date): Your basis is what you paid, plus a portion of the discount that's taxed as ordinary income
- Disqualifying disposition (held less than the required periods): The full discount is taxed as ordinary income on your W-2, which increases your basis
According to IRS rules, ESPP basis calculations can be complex. Consider consulting a tax professional if donating ESPP shares, especially if held less than 2 years from the offering date.
Where to find it:
- ESPP purchase confirmation from your broker
- W-2 (shows ordinary income when you have a disqualifying disposition)
- Form 3922 (employer mails one after each ESPP purchase)
- Equity compensation statements from your employer
6. RSUs (restricted stock units)
Cost basis = Amount included in your W-2 when shares vested.
According to IRS rules, when RSUs vest, the value is taxed as ordinary income and reported on your W-2. That amount becomes your cost basis.
Where to find it:
- Your W-2 (from the year of vesting)
- Equity compensation statements
- "Sell to cover" documents (if your employer sold shares to pay taxes on your behalf)
Finding fair market value (FMV) on donation date
You also need the fair market value on the date you donated the shares. This is what you can potentially deduct.
For publicly traded stock
Publication 561 says to use the average of the high and low trading prices on the donation date. If nothing traded that day, use the average of the nearest day before and after.
Where to find it:
- Yahoo Finance (historical prices)
- Google Finance (historical data)
- Your brokerage statement
- Your broker often provides a "charitable contribution statement" with the FMV
For private/non-traded stock
If your claimed value exceeds $5,000, you need a qualified appraisal and Form 8283 Section B. Publicly traded securities are the lone exception to the appraisal rule.
Common scenarios summary
| How You Got the Stock | Your Cost Basis |
|---|---|
| Purchased | What you paid + commissions |
| Gift | What the donor originally paid |
| Inheritance | FMV at date of death (stepped-up) |
| Stock options (NSO) | Strike price + W-2 income |
| Stock options (ISO) | Strike price (AMT may differ) |
| ESPP | What you paid + discount income |
| RSUs | W-2 income when vested |
What if I don't know my cost basis?
For old or complex holdings:
- Contact your brokerage – they often have historical records
- Check old tax returns (Forms 1099-B from prior years)
- If truly unknown, you may need to use $0 as basis (least favorable to you)
- Consult a tax professional for complex situations
Note: Brokers must track basis for “covered” securities (stocks purchased after January 1, 2011, and certain other securities after 2014). Older shares may not have basis automatically.
Form 8283 requirements
According to IRS Form 8283 Instructions, if your total non-cash donations exceed $500, you must file Form 8283 with your tax return:
- Section A ($500-$5,000): List donations, include acquisition info
- Section B (over $5,000): Generally requires qualified appraisal (except publicly traded securities)
Publicly traded securities are exempt from the appraisal requirement, even if valued over $5,000.
Charity Record is a donation tracking tool, not a tax advisor. This article summarizes publicly available IRS guidance to help you use our software. You are responsible for ensuring your tax filings comply with IRS requirements. For complex stock holdings (ISOs, ESPPs with disqualifying dispositions, gifted stock with losses, etc.), consult a tax professional for advice specific to your situation.