The investor’s guide to donor-advised funds

Summary

• Donating stock you’ve held for more than a year doesn’t trigger capital gains tax because you’re donating, not selling. And if you itemize, you can generally deduct its full market value, not just what you originally paid.
• A donor-advised fund (DAF) lets you take the tax deduction in the year your DAF receives the shares, and lets you recommend grants to charities over time on your own schedule.
• Tax changes that took effect in 2026 reward larger, less frequent gifts, which makes bunching more valuable.
• On Frec, you can donate directly from a direct index or self-managed holdings, and open a Daffy account directly in the donation flow if you don’t already have a donor-advised fund.

Many investors give to charity with cash while holding stock that has grown in value. Donating those shares instead can be a more tax-efficient way to give. Because you’re donating rather than selling, capital gains tax isn’t triggered, so the full value of the shares can go to your giving instead of what’s left after taxes. Wealth managers have used donor-advised funds to put this strategy to work, and it’s one any investor can consider.

What is a donor-advised fund (DAF)?

A donor-advised fund is a charitable giving account, sponsored by a public charity. Think of it the way you think of an IRA or a 529: an account with a specific purpose and its own tax treatment. One key difference: once you contribute, the assets belong to the sponsoring charity, and you recommend how they’re granted to charities. Contributions are irrevocable.

You contribute cash or investments, may be eligible to take the tax deduction in the year your DAF receives your contribution, and then recommend grants to any eligible US public charity whenever you choose. Until you grant it, the money can stay invested and grow tax-free.

How a DAF works

1. Open a DAF with a sponsor such as Daffy, Fidelity Charitable, Schwab Charitable or Vanguard Charitable. Most can be opened online in minutes.
2. Contribute assets like cash, stock or ETFs.
3. Take the deduction if you itemize, in the tax year the DAF receives the contribution. The sponsor sends you a receipt for each contribution.
4. Invest while you decide. Your DAF balance can stay invested and grow tax-free until you grant it.
5. Recommend grants to eligible charities on your own schedule once you’ve decided which causes to support.

What are the benefits of a DAF?

A DAF is more than an account for charitable dollars. Used well, it changes what you give, when you take the deduction and how your gifts grow before they reach a charity.

1. Donate appreciated stock instead of cash

When you donate shares held for more than a year, two things happen. You don’t pay capital gains tax on their growth, and if you itemize, you can generally get a tax deduction for their full fair market value, not what you originally paid.Many charities aren’t set up to accept stock directly. A DAF accepts it for them and turns it into grants they can use.

Here’s a hypothetical. A single investor with $400,000 of adjusted gross income (AGI), in the 35% federal bracket, wants to give $20,000 and holds $20,000 of stock bought for $5,000 several years ago. They pay 15% on long-term gains plus the 3.8% net investment income tax. Starting in 2026, only charitable gifts above 0.5% of AGI are deductible (more on this below), so the first $2,000 of this investor’s giving doesn’t count.

	Sell the stock, donate the cash	Donate the stock to a DAF
Capital gains tax on the $15,000 gain	$2,820	$0
Amount that reaches charity	$17,180	$20,000
Deductible amount (after the first $2,000)	$15,180	$18,000
Federal tax savings from the deduction (35% bracket)	$5,313	$6,300

Donating the stock directly puts $2,820 more towards the charity and saves $987 more in federal income tax. The 0.5% floor reduces both deductions by about $2,000, so it barely changes the gap. The more a position has grown, the bigger the gap. This example covers federal taxes only. It assumes the investor already itemizes and that this is their only charitable gift this year. It also applies the floor to AGI before any sale; selling the stock would raise AGI slightly and widen the gap. Your results will depend on your own tax situation.

2. Clear the standard deduction by bunching

Charitable gifts can lower your taxes only if you itemize, and itemizing only makes sense when your deductions add up to more than the standard deduction. Since the standard deduction roughly doubled in 2018, some people who give every year may not clear it, so their generosity doesn’t come with a tax break.

A DAF lets you “bunch” several years of giving into one tax year. You itemize that year, take the standard deduction in the years between, and keep granting to charities on your usual schedule.

Here’s a hypothetical example. Suppose a couple filing jointly with $300,000 of AGI has a standard deduction of $32,200. They have $20,000 of other itemized deductions (state taxes, mortgage interest) and give $10,000 a year. Under the 0.5% floor, the first $1,500 of their giving each year isn’t deductible.

	Give $10,000 every year	Bunch 3 years into one DAF contribution
Year 1 deduction	$32,200 (standard)	$48,500 (itemized)
Year 2 deduction	$32,200 (standard)	$32,200 (standard)
Year 3 deduction	$32,200 (standard)	$32,200 (standard)
Total deductions over 3 years	$96,600	$112,900

Same dollars given, $16,300 more in tax deductions. This assumes the same standard deduction each year. It also assumes the couple’s annual gifts don’t qualify for the new non-itemizer deduction. If they gave cash directly to public charities, they could deduct up to $2,000 more each year, which narrows the gap to $10,300.

Bunching works best in a year when your income is unusually high, such as an RSU vest, an IPO, a tender offer or a large bonus, because each deducted dollar offsets income at your highest marginal rate.

3. Take the deduction now, choose charities later

The deduction counts in the year the DAF receives your contribution, even if you haven’t decided where the money goes. That separates two decisions that usually get rushed together: the tax decision, which has a deadline, and the giving decision, which shouldn’t.

Until you grant it, the balance stays invested in your DAF and any growth is tax-free, potentially providing more meaningful grants to charities down the line.

4. Keep your giving organized

When you use a DAF for your charitable giving, every gift runs through one account. You get receipts from one DAF sponsor instead of chasing one from every charity, one record of everything you’ve given, and one place to set up recurring grants.

Is a DAF right for you?

A DAF may be worth considering if you donate regularly, or plan to, and at least one of these is true:

• You hold stocks or ETFs that have grown and that you’ve held for more than a year.
• You’re close to the standard deduction and could clear it by bunching.
• You’re having a high-income year and want a larger deduction now.
• You want time to decide which charities to support.

For occasional small cash gifts, a DAF may add less value. Keep in mind that contributions can’t be taken back and that DAF sponsors charge their own fees. For investors who give regularly and hold appreciated assets in a taxable account, it’s often worth a closer look, and the next question is usually which shares to give.

What to consider when donating stock

1. Shares held more than a year

Shares held more than one year are generally deductible at the full fair market value. Shares held a year or less are generally limited to what you originally paid, whichever is lower, so most of the advantage disappears. Long-term lots are generally the place to start.

2. Appreciated lots

The deduction is the market value of the shares, so a position valued today at $10,000 that was bought for $2,000 earns the same deduction as $10,000 you bought for $9,000. But with the first, you don’t realize or pay tax on $8,000 of gain. With the second, you don’t realize or pay tax on the $1,000 of gain. If you hold the same stock in several lots, the ones that have gained the most generally offer the biggest benefit.

Rules worth knowing

1. Deduction limits

Gifts of appreciated stock to a DAF are generally deductible up to 30% of your adjusted gross income (AGI). Cash gifts go up to 60%. Anything over the limit can be carried forward for up to five years.

2. Timing

The deduction counts for the year the DAF receives the shares, not the year you start the transfer. Stock transfers take days, so don’t leave year-end gifts until the last week of December. Your DAF provider may also set an earlier year-end cutoff, so check its deadline.

3. Irrevocability

A contribution can’t be taken back. Grants must go to eligible public charities, not individuals or political campaigns. They also can’t pay for anything you receive in return, such as event tickets or tuition, or fulfill a legally binding pledge.

4. Changes in 2026

The 2025 tax law changed how charitable deductions work starting in 2026:

• A 0.5% floor: If you itemize your deductions on your tax return, the first 0.5% of your AGI in charitable gifts isn’t deductible. With $400,000 of AGI, a $50,000 gift gets you a $48,000 deduction, since the first $2,000 doesn’t count.
• A cap for the top bracket: If you’re in the 37% federal tax bracket, itemized deductions are worth at most 35 cents per dollar. A $10,000 itemized deduction has about $3,500 in tax savings instead of $3,700.
• A deduction for non-itemizers that excludes DAFs: People who take the standard deduction can now deduct up to $1,000 (single) or $2,000 (married filing jointly) of cash gifts to public charities. Contributions to DAFs and gifts of stock don’t qualify.
  

None of these changes affect the main benefit of donating stock. You still do not owe capital gains tax on the appreciation of the stocks you give.

The floor also makes bunching more valuable. It applies every year you give, so one large gift loses the floor once, while smaller gifts spread over several years lose it each time. Talk to a tax advisor about how these rules apply to you.

How to donate stock to a DAF on Frec

Frec builds this strategy into your account, and giving from a direct index may offer additional tax advantages. When you give from your direct index, Frec picks your most appreciated long-term lots, then invests your cash across the index at current prices, which can create new opportunities to harvest losses in future years, on top of the tax benefits of the donation itself.

Through our integration with Daffy, you can create a new DAF or link your existing Daffy account. You can also link a DAF you already have elsewhere, such as Fidelity Charitable, Schwab Charitable or Vanguard Charitable.

Frec doesn’t charge a fee to donate. Donations to Daffy have no transfer fee. Donations to other providers carry a $5 transfer fee per stock or ETF from our custodian. Daffy promotes Frec to its members. Frec is not affiliated with Daffy, and no compensation is exchanged.

To donate from your direct indices

1. Click Transfer, choose Donate and select your direct index.
2. Open a DAF through Daffy or link an existing one.
3. Choose an amount. We show you the most you can donate from eligible shares.
4. Add the same amount in cash by bank transfer (ACH), wire, cash already on Frec or your portfolio line of credit¹.
5. Review the estimate. Frec identifies your most appreciated lots held more than a year and shows the estimated shares, their value and the estimated capital gains you won’t pay tax on. If those shares back your portfolio line of credit, we’ll flag any margin call risk.
6. Submit your DAF donation. When your cash arrives, Frec sends the shares to your DAF and invests your cash back into your index.

Frec picks the shares for you: lots held more than a year with the largest gains, across up to 8 stocks, with a total market value as close as possible to your amount. Your dollar amount is locked when you submit, and the final shares are chosen at current prices once your cash arrives. Your deduction is based on the shares’ fair market value on the day your DAF receives them, which may differ from the amount you entered, and your cash is invested across your index at current prices.

Donate and reinvest, done in one flow. Your index stays on track, and the new lots give you fresh room to harvest losses in the future.

To donate from your self-managed holdings

1. Click Transfer, choose Donate and select your self-managed holdings.
2. Open a DAF through Daffy or link an existing one.
3. Select the eligible lots you would like to donate.
4. Review and submit your donation to your DAF. Donations are made in whole shares. If the shares you donate back your portfolio line of credit, your borrowing power drops once they leave your account, which could trigger a margin call.

Donation deadline

• December 31: your DAF must receive your contribution by December 31 for it to count toward your 2026 taxes. Transfers take time, so we recommend starting early, and no later than December 15. December 15 is a recommendation, not a guarantee. Transfers don’t settle on weekends or market holidays, including December 25 and January 1.
• Direct index donations: the shares move only after your cash arrives. A bank transfer (ACH) can take several business days, so start earlier, or use a wire or cash already on Frec.
• Outside DAFs: transfers to providers other than Daffy go through DTC and can take longer. Leave extra time if you’re giving to Fidelity Charitable, Schwab Charitable, Vanguard Charitable or another sponsor.
• One donation at a time: you can start a new donation once the current one settles, so plan multiple gifts with time to spare.