(I’m not a tax attorney/accountant and have no imminent plans to try this. Consider this speculative)
TLDR: You can save almost an additional capital gains rate (15-20%) on your charitable donations if you donate appreciated assets or do some silly-looking financial transacting.
One of the side effects of charitable donations, at least in the US, are the tax savings. Donations are deductible from your income tax. This will lower your tax bill by the amount you donated times your marginal rate. (This assumes that you are itemizing and not taking the standard deduction). So if you are in the say 25% tax bracket then you would get 25 cents back for every dollar donated so 25 percent efficiency. This is great but what if you could do better?
One way to do better is to donate highly appreciate capital assets. Donating assets is not only deductible in the same way donating cash is by deducting the worth of the assets donated as if they were cash but also avoids any capital gains tax on the assets. So if you bought a stock at 1 dollar and donated it when it was worth 10 dollars then you could not not only save (25% income tax rate) *$10 =$2.50 but also would save (15%) * $9= $1.35 in capital gains tax as well netting a saving 38.5%.
Not bad, eh? But what if you don’t have any highly appreciated capital assets? Is there a way you could manufacture highly appreciated capital assets?
If prediction markets contracts were considered to be capital assets (I believe they are not in the US) you could simply find an event to bet on with every outcome having low probability and bet on every outcome. For simplicity there might be 9 candidates for Democratic Presidential nominee and one “other candidate, the highest contract might be valued at 2 dollars for a 10 dollar payout. By buying every contract for a total of $10.50 you have guaranteed that when the market resolves you’ll end up with one contract worth 10 dollars and the rest worth nothing.
Great, you’ve just managed to guarantee a loss of 50 cents, but you’ve also put all that $10.50 into an appreciated asset that you can now donate to charity and avoid the capital gains tax and accrued bunch of capital losses that you can deduct. So for 10.50 you are able to donate 10 dollars to charity deducting (25% income tax rate) * $10 dollars = $2.50 as well as deducting at least (15% capital gains tax rate) * ($10.50-$2.00) = $1.275 meaning that it only effectively cost you $6.725 to donate 10 dollars to charity for a savings of 32.75 percent which is better than the 25 percent savings by just donating cash. In the limit with no trading losses and arbitrarily small assets you can deduct the full income tax rate and capital gains rate (so 40% in our examples).
Are there financial assets in the real work that might work for this? I’m not so sure. Binary range or tunnel options sound like what you’d want but they don’t seem to be structured they way you’d want in that each option includes the others instead of excluding it making this type of strategy impossible. Alternatively, if one was risk neutral with their donations, then one could construct highly appreciated assets by simply invest in a highly risky asset and get the same effect if one was risk averse.
Why have I not heard of this before? It is a pretty unusual situation and requires some odd financial techniques (it allows and allows for arbitrage). Maybe charitable donors don’t usually concoct unusual tax schemes.