Is using a DAF essentially tax gain harvesting?

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elnegativo
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Is using a DAF essentially tax gain harvesting?

Post by elnegativo »

Just making sure I understand this. I opened a DAF last year for charitable contributions. When I donate shares, I immediately buy the amount I donated back with the cash I would have used for the charitable gift.

So let’s say in the next ten years I donate $500,000 in appreciated shares. Since I am buying shares back at a higher basis, when I start selling from my taxable account for retirement, I should owe less in capital gains taxes than I otherwise would have had I not used the DAF/buyback strategy. Is that correct?
senex
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Re: Is using a DAF essentially tax gain harvesting?

Post by senex »

Yep, exactly right.
MrJedi
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Re: Is using a DAF essentially tax gain harvesting?

Post by MrJedi »

This is how I use it to raise my cost basis when I give charitable gifts anyway.

You can get an additional benefit by bunching a bunch of years of donations together and itemizing deductions. However due to the currently very large standard deduction, I would need to bunch 3 years together to get an itemizing benefit, so I do not bother since that is a little too much for me. If I could get an itemizing benefit by bunching 2 years together, I would probably do that.
aristotelian
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Re: Is using a DAF essentially tax gain harvesting?

Post by aristotelian »

What do you mean by buying shares back? Shares that go into the DAF are gone for good.

What you do with new dollars coming in is irrelevant since you would be buying those shares whether or not you donated to the DAF.

The apples to apples comparison is donating cash vs donating appreciated stock. Assuming your example of $500k over 10 years, $5k in state and local tax, married filing jointly.

With $50k cash per year, you get $55k per year of itemized deductions ($550k of deduction spread evenly over 10 years). Your current shares increase their unrealized gains so you have more future tax to pay.

With DAF, let's say you group the donations into 5 donations of $100k. You get the standard deduction of $25k in half of the years, plus you get itemized donations of $105k in half the years ($650k of total deduction), plus your remaining stock allocation will have higher basis.

Tax gain harvesting refers to realizing gains at a low tax rate which is not really the case with DAF. You are correct that your stock allocation will end up with a higher overall basis than when making regular cash donations.
Last edited by aristotelian on Fri Oct 22, 2021 10:16 am, edited 1 time in total.
dbr
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Re: Is using a DAF essentially tax gain harvesting?

Post by dbr »

Well, there is a process there to avoid capital gains taxes, but I would not put the mechanics in the same box as tax gain harvesting.

The mechanics of DAF are probably more akin to avoiding capital gains taxes by basis step up at death. In both cases the money has to end up belonging to someone else.

I recently gave some appreciated stock to someone who will be able to tax gain harvest where I would not be able to. That is a different variation on the theme.
exodusNH
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Re: Is using a DAF essentially tax gain harvesting?

Post by exodusNH »

elnegativo wrote: Fri Oct 22, 2021 9:43 am Just making sure I understand this. I opened a DAF last year for charitable contributions. When I donate shares, I immediately buy the amount I donated back with the cash I would have used for the charitable gift.

So let’s say in the next ten years I donate $500,000 in appreciated shares. Since I am buying shares back at a higher basis, when I start selling from my taxable account for retirement, I should owe less in capital gains taxes than I otherwise would have had I not used the DAF/buyback strategy. Is that correct?
If you were going to donate $X anyway, you are in a better position than if you donated the cash directly. However, this isn't tax gain harvesting in the traditional sense since it's not being uses solely for your benefit.
NYCPete
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Re: Is using a DAF essentially tax gain harvesting?

Post by NYCPete »

dbr wrote: Fri Oct 22, 2021 10:12 am Well, there is a process there to avoid capital gains taxes, but I would not put the mechanics in the same box as tax gain harvesting.

The mechanics of DAF are probably more akin to avoiding capital gains taxes by basis step up at death. In both cases the money has to end up belonging to someone else.

I recently gave some appreciated stock to someone who will be able to tax gain harvest where I would not be able to. That is a different variation on the theme.
The idea of giving another person appreciated stock (as opposed to a charity) isn't something I've heard of or read about before, and makes me very curious. Can you say more about this? I can imagine a situation where you transferred stock in-kind to a family member or loved one, and either A) they had capital losses to offset or B) they had a low enough income that their LTCG tax rate would be 0%. And I'm assuming you gave under the annual gift tax limit?

Would be interested to hear more about this.

Best,
Peter
To the extent that a fool knows his foolishness, | He may be deemed wise | A fool who considers himself wise | Is indeed a fool. | | Buddha
dbr
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Re: Is using a DAF essentially tax gain harvesting?

Post by dbr »

NYCPete wrote: Fri Oct 22, 2021 11:26 am
dbr wrote: Fri Oct 22, 2021 10:12 am Well, there is a process there to avoid capital gains taxes, but I would not put the mechanics in the same box as tax gain harvesting.

The mechanics of DAF are probably more akin to avoiding capital gains taxes by basis step up at death. In both cases the money has to end up belonging to someone else.

I recently gave some appreciated stock to someone who will be able to tax gain harvest where I would not be able to. That is a different variation on the theme.
The idea of giving another person appreciated stock (as opposed to a charity) isn't something I've heard of or read about before, and makes me very curious. Can you say more about this? I can imagine a situation where you transferred stock in-kind to a family member or loved one, and either A) they had capital losses to offset or B) they had a low enough income that their LTCG tax rate would be 0%. And I'm assuming you gave under the annual gift tax limit?

Would be interested to hear more about this.

Best,
Peter
Sure, it's simple. My son has been in school all year and his wife on unpaid leave. They have no income and can realize significant capital gains at no tax cost when selling appreciated shares that I want to give them. Next year they will be above the AGI for 0% tax on CG.
interwebopinion
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Re: Is using a DAF essentially tax gain harvesting?

Post by interwebopinion »

dbr wrote: Fri Oct 22, 2021 11:30 am Sure, it's simple. My son has been in school all year and his wife on unpaid leave. They have no income and can realize significant capital gains at no tax cost when selling appreciated shares that I want to give them. Next year they will be above the AGI for 0% tax on CG.
I learn something new on this here website everyday. In retrospect, I have to say: :oops:
interwebopinion
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Re: Is using a DAF essentially tax gain harvesting?

Post by interwebopinion »

elnegativo wrote: Fri Oct 22, 2021 9:43 am Just making sure I understand this. I opened a DAF last year for charitable contributions. When I donate shares, I immediately buy the amount I donated back with the cash I would have used for the charitable gift.

So let’s say in the next ten years I donate $500,000 in appreciated shares. Since I am buying shares back at a higher basis, when I start selling from my taxable account for retirement, I should owe less in capital gains taxes than I otherwise would have had I not used the DAF/buyback strategy. Is that correct?
I'm not sure I buy this. You can deploy that cash any way you wish, and it's independent of the DAF. You've paid tax on it already (presumably). I suppose you can link the newly purchased shares with the donated chunk, but in reality they are not connected.
milktoast
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Re: Is using a DAF essentially tax gain harvesting?

Post by milktoast »

interwebopinion wrote: Fri Oct 22, 2021 12:14 pm I'm not sure I buy this. You can deploy that cash any way you wish, and it's independent of the DAF. You've paid tax on it already (presumably). I suppose you can link the newly purchased shares with the donated chunk, but in reality they are not connected.
Right. But let's assume you are going to donate $10,000 and you have $10,000 in cash. Assume that is the goal and starting position.

Obvious thing is to hand over $10,000 in cash.

But if you instead hand over $10,000 in appreciated stock and immediately buy $10,000 in same stock you have achieved the same goal from the charity perspective. But you have raised the cost basis in your stock portfolio, reducing future capital gains taxes.

Not really gain harvesting. But it is an advantage over cash donations.
Topic Author
elnegativo
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Re: Is using a DAF essentially tax gain harvesting?

Post by elnegativo »

Thanks everyone for the replies. Sounds like I understood the process and tax implications properly but used the wrong terminology.
NYCPete
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Re: Is using a DAF essentially tax gain harvesting?

Post by NYCPete »

dbr wrote: Fri Oct 22, 2021 11:30 am
NYCPete wrote: Fri Oct 22, 2021 11:26 am
dbr wrote: Fri Oct 22, 2021 10:12 am Well, there is a process there to avoid capital gains taxes, but I would not put the mechanics in the same box as tax gain harvesting.

The mechanics of DAF are probably more akin to avoiding capital gains taxes by basis step up at death. In both cases the money has to end up belonging to someone else.

I recently gave some appreciated stock to someone who will be able to tax gain harvest where I would not be able to. That is a different variation on the theme.
The idea of giving another person appreciated stock (as opposed to a charity) isn't something I've heard of or read about before, and makes me very curious. Can you say more about this? I can imagine a situation where you transferred stock in-kind to a family member or loved one, and either A) they had capital losses to offset or B) they had a low enough income that their LTCG tax rate would be 0%. And I'm assuming you gave under the annual gift tax limit?

Would be interested to hear more about this.

Best,
Peter
Sure, it's simple. My son has been in school all year and his wife on unpaid leave. They have no income and can realize significant capital gains at no tax cost when selling appreciated shares that I want to give them. Next year they will be above the AGI for 0% tax on CG.

Interesting. Thank you for sharing!
To the extent that a fool knows his foolishness, | He may be deemed wise | A fool who considers himself wise | Is indeed a fool. | | Buddha
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grabiner
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Re: Is using a DAF essentially tax gain harvesting?

Post by grabiner »

You can do the same thing without a DAF. I make my own charitable donations from highly appreciated stock, and then buy new stock, getting rid of the capital gain.
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Lee_WSP
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Re: Is using a DAF essentially tax gain harvesting?

Post by Lee_WSP »

grabiner wrote: Sat Oct 23, 2021 10:10 pm You can do the same thing without a DAF. I make my own charitable donations from highly appreciated stock, and then buy new stock, getting rid of the capital gain.
This response.

There’s no reason to use a DAF if all you wanted to do was donate highly appreciated shares to charity so as to avoid capital gains and fulfill your charitable intentions.
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Re: Is using a DAF essentially tax gain harvesting?

Post by IowaFarmBoy »

Lee_WSP wrote: Sat Oct 23, 2021 10:40 pm
grabiner wrote: Sat Oct 23, 2021 10:10 pm You can do the same thing without a DAF. I make my own charitable donations from highly appreciated stock, and then buy new stock, getting rid of the capital gain.
This response.

There’s no reason to use a DAF if all you wanted to do was donate highly appreciated shares to charity so as to avoid capital gains and fulfill your charitable intentions.
This is true but.... Not all charities have set up the mechanisms to handle stock donations well (think small local charity like a church). Not all of my gifts are big enough (think $50) to make this worth doing. And it is much easier/simpler to use the DAF than do multiple individual stock donations during the year.

I do individual stock to one charity because my employer matches it that way. The employer will not match a donation from my DAF.
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Re: Is using a DAF essentially tax gain harvesting?

Post by TN_Boy »

Lee_WSP wrote: Sat Oct 23, 2021 10:40 pm
grabiner wrote: Sat Oct 23, 2021 10:10 pm You can do the same thing without a DAF. I make my own charitable donations from highly appreciated stock, and then buy new stock, getting rid of the capital gain.
This response.

There’s no reason to use a DAF if all you wanted to do was donate highly appreciated shares to charity so as to avoid capital gains and fulfill your charitable intentions.
We've had numerous threads on DAFs, and I think grabiner and Lee_WSP posts, while accurate, minimize/omit the other advantages of a DAF. In particular:

1) Smaller organizations may not be able to accept stock donations
2) A while back (before I had a DAF) I wanted to gift mutual fund shares. It was either painful or impossible, I forget which. The recipient organization could have handled stock or ETF shares.
3) If desired, you easily can donate anonymously with a DAF

but the huge one for us:

4) You can batch donations.

The combination of our tax situation and desired giving amounts means we would never itemize unless we batched donations. By batching several years worth of donations to a DAF, we pay less taxes than we would otherwise while the target organizations get the same amount of help.

And yes, per the OP, we do the equivalent of tax-gain harvesting by donating appreciated shares and then buying them again.
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Re: Is using a DAF essentially tax gain harvesting?

Post by Lee_WSP »

Yes, if there are other reasons to do the DAF, then the cost benefit starts to shift. It’s not particularly cumbersome, but if your organization can do it or is willing to set it up because you’ll be doing this for the rest of your life, then it’s just simpler to donate the stock directly.
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Re: Is using a DAF essentially tax gain harvesting?

Post by MrJedi »

I use the DAF without batching multiple years together because it is simpler administratively for the small charity I give to. They are not setup to receive securities directly so the DAF is simpler because they get the gifts as checks in the mail, something they are already familiar with processing.

Right now I do not batch into the DAF simply because of the large standard deduction we have now. I am only comfortable batching two years of gifts at a time right now, but that isn't quite enough to overcome the current standard deduction.
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Re: Is using a DAF essentially tax gain harvesting?

Post by TN_Boy »

Lee_WSP wrote: Sun Oct 24, 2021 11:39 am Yes, if there are other reasons to do the DAF, then the cost benefit starts to shift. It’s not particularly cumbersome, but if your organization can do it or is willing to set it up because you’ll be doing this for the rest of your life, then it’s just simpler to donate the stock directly.
I don't know how easy it was to setup donations of stock to the charity you are interested in, but my recollection (it's been a while) is that setting up a DAF is quite easy, and certainly once setup, contributing appreciated stocks/funds/ETFs etc is trivial, as is making a grant to an organization.

And the flexibility you have with a DAF is great -- donate to any appropriate organization quickly, batch donations, etc.

I can think of valid reasons not to do a DAF -- we've had several threads on them -- but complexity is not one of them. Working with the DAF is one of the easiest finance related things I do.
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Re: Is using a DAF essentially tax gain harvesting?

Post by MrJedi »

TN_Boy wrote: Mon Oct 25, 2021 2:59 pm
Lee_WSP wrote: Sun Oct 24, 2021 11:39 am Yes, if there are other reasons to do the DAF, then the cost benefit starts to shift. It’s not particularly cumbersome, but if your organization can do it or is willing to set it up because you’ll be doing this for the rest of your life, then it’s just simpler to donate the stock directly.
I don't know how easy it was to setup donations of stock to the charity you are interested in, but my recollection (it's been a while) is that setting up a DAF is quite easy, and certainly once setup, contributing appreciated stocks/funds/ETFs etc is trivial, as is making a grant to an organization.

And the flexibility you have with a DAF is great -- donate to any appropriate organization quickly, batch donations, etc.

I can think of valid reasons not to do a DAF -- we've had several threads on them -- but complexity is not one of them. Working with the DAF is one of the easiest finance related things I do.
I agree with you, at least for Fidelity's DAF and integration with the brokerage account. I can pick the exact lots to donate from the online interface, and if I do it during market hours they get liquidated immediately so I know almost exactly how much cash is going to settle for gifting. The shares leave the account immediately too. This is all done online in about 5 minutes. No delayed timing, phone calls, paper forms, coordinating with other people, etc.
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Re: Is using a DAF essentially tax gain harvesting?

Post by Lee_WSP »

TN_Boy wrote: Mon Oct 25, 2021 2:59 pm
Lee_WSP wrote: Sun Oct 24, 2021 11:39 am Yes, if there are other reasons to do the DAF, then the cost benefit starts to shift. It’s not particularly cumbersome, but if your organization can do it or is willing to set it up because you’ll be doing this for the rest of your life, then it’s just simpler to donate the stock directly.
I don't know how easy it was to setup donations of stock to the charity you are interested in, but my recollection (it's been a while) is that setting up a DAF is quite easy, and certainly once setup, contributing appreciated stocks/funds/ETFs etc is trivial, as is making a grant to an organization.

And the flexibility you have with a DAF is great -- donate to any appropriate organization quickly, batch donations, etc.

I can think of valid reasons not to do a DAF -- we've had several threads on them -- but complexity is not one of them. Working with the DAF is one of the easiest finance related things I do.
I did not say any of that. I said it's simpler, not harder or easier. Using a DAF is a personal choice.

Simpler is not always easier to accomplish and other means may be just as time consuming. It just means simpler.
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Re: Is using a DAF essentially tax gain harvesting?

Post by TN_Boy »

Lee_WSP wrote: Mon Oct 25, 2021 3:29 pm
TN_Boy wrote: Mon Oct 25, 2021 2:59 pm
Lee_WSP wrote: Sun Oct 24, 2021 11:39 am Yes, if there are other reasons to do the DAF, then the cost benefit starts to shift. It’s not particularly cumbersome, but if your organization can do it or is willing to set it up because you’ll be doing this for the rest of your life, then it’s just simpler to donate the stock directly.
I don't know how easy it was to setup donations of stock to the charity you are interested in, but my recollection (it's been a while) is that setting up a DAF is quite easy, and certainly once setup, contributing appreciated stocks/funds/ETFs etc is trivial, as is making a grant to an organization.

And the flexibility you have with a DAF is great -- donate to any appropriate organization quickly, batch donations, etc.

I can think of valid reasons not to do a DAF -- we've had several threads on them -- but complexity is not one of them. Working with the DAF is one of the easiest finance related things I do.
I did not say any of that. I said it's simpler, not harder or easier. Using a DAF is a personal choice.

Simpler is not always easier to accomplish and other means may be just as time consuming. It just means simpler.
Well, all I can say is that setting up and using a DAF is both simple and easy. Simpler is not always the same as easy -- e.g. it is simple to bench press 400 pounds. Just lie down and push the weight up. Yet I cannot, for it is not easy.

But I've found a DAF to be both. They are not right for many situations, but I do believe them -- at least the one I've used -- to be exceptionally straightforward.
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Re: Is using a DAF essentially tax gain harvesting?

Post by Lee_WSP »

Can't speak for others, but Fidelity does make it easy for users by taking on all the back end and accounting stuff, providing a slick user interface, and all the customer service. It's simple because they take care of all the stuff you don't see, for a fee, which is hardly noticable to most.
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