5 steps to maximize IPO benefits with charitable giving

Participating in an initial public offering (IPO), when a private company first sells shares of stock to the public, can be an exciting opportunity to generate significant wealth and liquidity—but are you prepared for the corresponding tax liabilities? Whether you’re an executive, employee, or early investor in a company going public, you have a potential opportunity to offset your tax burden in a high-income year when you give a portion of your shares directly to a public charity.

Donating long-term, highly appreciated stock is an underutilized charitable planning strategy you can deploy to both potentially minimize capital gains taxes owed on any appreciation and qualify for an immediate income tax deduction for the value of your gift, subject to IRS limitations. Beyond the potential tax benefits, making a charitable gift during this unique moment can be a powerful way to support the causes you care most about and ensure your financial windfall goes even further to do good in the world.

Consider the following steps to help potentially minimize taxes and maximize impact in connection with an IPO.

Step 1. Confirm your IPO shares are long term and highly appreciated

To achieve the most favorable tax treatment and take advantage of this gifting strategy, you’ll want to confirm the following: Have you held the shares for more than a year before gifting them to charity? Have the shares appreciated in value from the time of the initial investment(s)?

If both answers are “yes,” you can move forward. If not, the donation does not qualify for long-term capital gains treatment and will not carry the same potential tax advantages. This is particularly true if you have recently exercised stock options or received vested restricted stock units (RSUs). However, you may still offset your tax burden when you donate different appreciated securities from your portfolio—especially those held for longer than a year.

Step 2. Determine affiliate status and review IPO gifting rules with your advisor

Certain employees of a company are considered “affiliates” and may have different considerations for gifting their shares. Generally, this term applies to directors, executive officers, or shareholders who hold more than 10% of company stock. The term also applies to anyone deemed to be an “alter ego” of the affiliate, such as relatives living in the home of the affiliate or trusts controlled by the affiliate. Because affiliate status may impact when and how shares can be transferred, the issuer’s counsel will need to provide direction. If you are an affiliate, the gifting process will likely require a few additional steps.

Step 3. Understand IPO timing, lock-up periods, and when stock gifts may be restricted

From the company to the underwriters, certain parties can establish contractual restrictions that prohibit transactions in company stock. For example, it is a common practice for underwriters to establish a 90- to 180-day lock-up period immediately after the IPO.

Alternatively, companies may set up trading windows for all or a select group of employees to avoid any instances of potentially using inside information to trade improperly.

While you may be prohibited from buying or selling at certain times, there are some instances where you may still gift stock to charity, provided the charity agrees to hold the stock subject to the contractual or trading restrictions. Whether the transfer is permitted will generally be determined by the company’s counsel, and you may need to obtain a qualified fair-market-value appraisal to determine the value for your tax deduction.

Step 4. Donate IPO shares directly to charity to help potentially minimize capital gains taxes

Once you’ve confirmed that you are eligible to gift your shares and their holding period qualifies you for the most favorable tax treatment, you’re ready to make your gift.

But first, consider this: If you sell your long-term appreciated stock and donate the net cash, you become subject to capital gains tax. Instead, if you donate the stock directly to a public charity, you potentially minimize the capital gains tax and may also become eligible for an immediate income tax deduction. As a result, more of the asset’s value may be available to support the charity of your choice.

Step 5. Use a donor-advised fund to simplify IPO-related charitable giving

The entire process becomes even easier when you gift your shares directly to a public charity sponsoring a donor-advised fund program, such as Fidelity Charitable. When you contribute shares to Fidelity Charitable, you have the flexibility to determine how your gift can make an impact—whether that’s supporting charities on a timetable that works for you or using one gift of stock to support multiple charities. In addition, assets placed in a donor-advised fund may have the opportunity to grow tax-free over time.

Talk to your tax advisor about how a Fidelity Charitable Giving Account can support this tax-smart giving strategy when you are participating in an IPO to optimize its impact on your financial situation.