When giving charitably, most investors default to the simplest mechanism of writing a check. But this approach often leaves meaningful tax savings on the table—savings that can be enhanced substantially when charitable intent and direct indexing work together as complementary strategies.
Consider an advisory client in the 32% federal tax bracket (plus 5% state) who wants to donate $50,000 to charity. They plan to write a check from their savings account while continuing to hold a stock position purchased for $10,000, now worth $50,000, in a taxable account.
| Cash Donation from Savings Account | Stock Donation from Taxable Account | |
| Charitable Deduction Benefit: | $18,500 (37% (federal and state tax) × $50,000) | $18,500 (37% (federal and state tax) × $50,000) |
| Embedded Capital Gains Tax Eliminated: | n/a | $8,000 |
| Net After-Tax Cost: | $31,500 | $23,500 |
| Portfolio: | Still holds $50,000 security with $8,000 embedded tax liability | Retains $50,000 cash, can repurchase at stepped-up basis |
By strategically choosing which $50,000 to withdraw from the portfolio, you’ve secured $8,000 in permanent tax savings for your client—a 25% improvement in capital efficiency for identical charitable impact and market exposure.
How Direct Indexing and Charitable Giving Reinforce Each Other
Direct indexing generates the raw material. Instead of owning one or a handful of diversified equity ETFs, a direct indexing mandate owns 200+ individual securities across all sectors and factor exposures, each creating its own appreciation pattern. Market performance naturally generates positions with substantial embedded gains throughout the year.
Charitable giving harvests gains tax-free. Those appreciated positions flow to charities without triggering capital gains, permanently removing tax liability from your client's balance sheet.
Finally, cash redeployment replenishes fresh tax lots. The cash that would have been donated instead purchases new positions at current prices, establishing higher cost bases and resetting the appreciation clock.
In summary, direct indexing continuously creates appreciated positions, charitable giving continuously removes embedded gains, and cash redeployment continuously establishes new high-basis positions. Each component strengthens the other and maximizes tax benefits for a charitably minded client.
The Compounding Impact
Consider a client with charitable goals who donates $100,000 each year. With traditional ETFs, the client might donate an appreciated fund once, then revert to cash donations as newly purchased shares haven't yet appreciated meaningfully.
With direct indexing, the client has dozens of individual positions with varying appreciation each year. Every charitable contribution removes embedded gains. Every cash redeployment creates positions that become next year's donations. The strategy perpetuates itself.
Research by Sosner, Krasner and Gromis published in The Journal of Beta Investment Strategies demonstrates that investors can significantly increase the tax benefits of direct indexing through regular capital contributions and charitable giving of appreciated stocks. Their analysis shows that these strategies work synergistically: the charitable donations permanently remove embedded gains from the portfolio, while the capital contributions create fresh tax lots with higher basis, enhancing future tax-loss harvesting opportunities and reducing long-term tax drag.1
Over ten years of consistent $100,000 annual donations with 20% embedded gains, the client can eliminate approximately $200,000 in cumulative capital gains—resulting in $40,000 to $60,000 in permanent tax savings, in addition to any tax-loss harvesting benefits.
The Advisory Value Proposition
For charitably minded clients, direct indexing becomes more than a tax-loss harvesting strategy. It becomes the engine that makes systematic, tax-efficient charitable giving possible year after year.
Direct indexing combined with charitable giving creates a framework that turns philanthropic intent into a tool for reducing long-term tax drag—while preserving full market exposure and maximizing charitable impact.
Important Disclosures & Definitions
1 Sosner, N., Krasner, S., & Gromis, M. (2022). The Tax Benefits of Direct Indexing, and How They Are Affected by the Biden Tax Plan. The Journal of Beta Investment Strategies, 13(2), 28-51.
AAI001069 12/23/2026