The conversation surrounding President Joe Biden's proposed capital gains tax increase is currently dominated by those who fear its negative consequences for the investment flow into the U.S. economy.
What's yet to be fully considered are the positive implications that Biden's proposed taxes will have on the nonprofit space, through its potential to encourage investors to turn to philanthropy as a tax efficient solution for their money.
This proposal to double the tax on long-term capital gains from 20 percent to 39.6 percent will cost investors almost half of their profits—and even more when combined with state taxes. We can only guess what the effect on the investing landscape might be, as the new tax will be a key factor in how and where investors choose to deploy their capital.
Because of this, I believe we will start to see a closer alignment between the financial incentives for philanthropy and investing. That is—there will be an increase in everyday Americans and investors alike directly donating their appreciated stocks to the charitable organizations they are passionate about—as it will become the most tax efficient way to give more.
Most investors have a long-term belief in the stocks they hold. Any appreciation of that stock's value over an extensive period of time can lead to substantial capital gains when they sell. One resulting behavior is that investors donate a portion of their appreciated shares to nonprofits, and then buy new shares to reset their cost basis at the current, higher price. This would minimize their future capital gains tax exposure.
By donating stock that has appreciated for more than a year under the newly increased tax law, investors would now be able to give 39.6 percent more than if they had made a cash donation because they will be able to offset their capital gains tax. Most investors would see this as an opportunity to increase the value of their donation for a nonprofit and give more generously.
This isn't just a behavior that serves to benefit wealthy investors. Everyday Americans could benefit from this donation mindset shift, too. When people are deciding between donating from their pool of disposable income (held in cash), or donating from their investment portfolio (held in stocks)—the same numerical amount will feel like a significantly smaller percentage of a donor's total wealth and assets in comparison to their weekly or monthly disposable income.
For context, most U.S. family households hold their wealth in assets, not cash (approximately 90 percent of donors hold wealth in non-cash assets, compared to the 10 percent who hold wealth in cash). Since donors hold more wealth in assets like stock than cash and they don't rely on stock for day-to-day expenses, stock donations usually end up being much larger than cash donations.
The spillover effects of investors' increased generosity in terms of stock gifts will, in turn, have a direct impact on how quickly nonprofits are able to grow. This is one of the reasons why nonprofits who make it easier to accept stock gifts can greatly increase their net value contributions. Studies have shown that nonprofits receiving stock are growing 55 percent faster than those that don't.
As the founder of a company that's providing tech solutions to increase charitable giving, I have witnessed firsthand the expanded generosity of those who are able to donate shares from their stock portfolio rather than cash from their bank account. By tapping into the funds locked away in investments, donors have so much more to give—our average stock donation is 47 times the size of one made in cash through online giving platforms.
Biden's new tax plan will encourage people to realize the intrinsic reward of giving—whether they do so for self-interested or altruistic reasons. Investors shouldn't dwell on how they will have less to gain, but rather focus on how they will have more to give.
Vance Roush is the founder of Overflow.
The views expressed in this article are the writer's own.
