The charitable-giving optimizer: which lots leave the portfolio without realising the gain

Donating cash to a qualified charity gives the donor a deduction equal to the cash amount. Donating long-term appreciated stock gives the donor a deduction equal to the stock's fair market value, and avoids the capital-gains tax on the embedded appreciation. The arithmetic almost always favours the stock — but only if the donor picks the right lots. The charitable-giving optimizer does that selection: which lots leave the portfolio without realising the gain, subject to a cap on how off-track the residual portfolio drifts.

max   Σ_i  embedded_gain_i  ·  donate_i
 donate

s.t.   Σ_i  fmv_i  ·  donate_i   =  G                  (gift target met)
       0  ≤  donate_i  ≤  shares_i                      (per-lot ceiling)
       TE(w_after) ≤ TE_max                             (TE preservation)
       AGI cap on FMV deduction (optional, deferred)

The charity is indifferent between cash and stock — either way they liquidate. The donor is not. The "give stock" path delivers the same deduction as a $250k cash gift while keeping the $43,860 of would-be capital-gains tax in the donor's pocket. The optimizer's job is to maximise that delta — equivalent to maximising the embedded gain in the donated lot list.

Donating appreciated stock is the rare structure where the donor's tax-saving and the charity's economics align with the same trade.

The lots with the largest embedded gain are usually the names that compounded the most — which means they're often the biggest positions in the residual portfolio. Donating them away without replacement leaves the residual book under-weighted in those names relative to the benchmark, which widens TE. The TE-preservation constraint limits that drift. If TE_max is loose, donations cluster in the deepest-appreciated names; tight, and they spread across the portfolio.

Long-term appreciated stock donated to a public charity is deductible at FMV up to 30% of the donor's AGI. Excess deduction carries forward five years. For donors with high net worth and modest income, the AGI cap binds — and the optimizer can be told to size the gift to the cap rather than to a dollar target. Pass {agi_cap: 0.30, agi: $X} and the constraint becomes Σ FMV · donate ≤ 0.30 × AGI.

The tool returns a list of lots and shares. It doesn't pick the receiving vehicle — direct charity transfer, donor-advised fund (DAF), private foundation. Each has different tax consequences (DAFs preserve the donor's flexibility on which charity ultimately receives; private foundations have stricter AGI limits on appreciated-stock donations). That's a conversation for the donor's adviser, downstream of the optimizer's output.

• Short-term lots are excluded by default. Short-term appreciated stock is deductible only at basis, not FMV. The optimizer filters them out unless the holder explicitly opts them in (rare).
• Bunching strategies. Donors who alternate "give heavily one year, take the standard deduction the next" benefit from a multi-year version of this optimizer; that's a planning conversation, not a one-shot output.
• State deduction asymmetries. Some states cap or disallow charitable deductions; the federal-equivalent number the optimizer surfaces overstates the after-state benefit in those states.

For the related concentrated-position tool, see the options overlay deep-dive. For the year-end harvest tool, see year-end loss harvest maximiser.

Educational illustration · numbers illustrative. Not investment, tax, or legal advice.