Do Nonprofits Pay Capital Gains on Stock?

Posted Nov 16, 2022

tablet-pen-stocks-IS-1185329526“Nonprofit organization” is somewhat of a misnomer. Companies and organizations structured as nonprofits (sometimes known as “non-business entities”) do generate money, generally through fund-raising activities and donations. 

But those funds aren’t distributed to an organization’s members, directors, or officers as they are through a for-profit entity. Rather those funds are dedicated to furthering a social cause or supporting a specific goal or mission. 

While “tax-exempt” is generally linked with “nonprofit,” nonprofit status and filing fall under state purview. Meanwhile, a nonprofit’s tax-exempt status is an exemption per the Internal Revenue Code. According to the IRS, organizations that are operated exclusively for religious, educational, or charity purposes, don’t have to pay certain taxes under the IRC Code Section 501(c)(3). And to be classified as a 501(c)(3) organization, that organization needs to

  • Be operated only for exempt purposes 
  • Serve the public, either through a service, sale of products, or both 
  • Ensure that none of its earnings end up in the pockets of private shareholders or individuals 

As such, nonprofit organizations are exempt from paying sales and property taxes. They’re also exempt from paying federal income taxes on funds raised, as long as those monies are directed specifically to that organization’s purpose. Specifically, a nonprofit doesn’t pay taxes on earnings or donations used to run the business. 

But what about income from passive investments? Do nonprofits have to pay capital gains taxes on the sale of stock or dividends received? 

This depends. If the nonprofit applied for (and received) 501(c)(3) status from the IRS, it’s generally exempt from many taxes. This can include taxes generated from private investments, like dividends, royalty, and interest. Along these lines, capital gains from the sale of stock are also often not subject to taxes—again, as long as the nonprofit has exempt status and uses the funds properly. 

But determining the overall tax requirements for nonprofits can be complex, even if those nonprofits are tax-exempt. Funds raised from activities directly connected to a nonprofit’s purpose are generally not taxed. But there are times in which unrelated business income (UBI) might be taxed.  

Similar to many tax situations, the “correct” answer can carry several “buts.” Because of this, a nonprofit that realizes capital gains from the sale of stock should work with a tax advisor to determine if those capital gains are exempt from taxes or not. 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. 

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. 

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