Yes, churches can invest in stocks. As tax-exempt organizations under Section 501(c)(3), they can hold shares, mutual funds, bonds, and ETFs, and the dividends, interest, and capital gains those investments generate are generally free from federal income tax.1Internal Revenue Service. Churches, Integrated Auxiliaries and Conventions or Associations of Churches The freedom to invest comes with two things worth understanding before the first trade: a short list of situations that make the income taxable after all, and real fiduciary duties on the people managing the money.
Why the Investment Income Is Usually Tax-Free
Churches meeting the requirements of Section 501(c)(3) are automatically treated as tax-exempt without having to apply for formal IRS recognition.1Internal Revenue Service. Churches, Integrated Auxiliaries and Conventions or Associations of Churches That exempt status carries over to investment income. The federal tax code specifically excludes dividends, interest, annuities, and gains from the sale of investments from the definition of taxable unrelated business income.2Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income
The practical effect: a church investing its own cash reserves in a diversified stock portfolio can reinvest 100 percent of the returns. The IRS treats this as passive income from existing assets rather than revenue from running a business. That treatment holds as long as the church is putting money it already has to work in ordinary securities.
When Investment Income Becomes Taxable
Two situations pull church investment income back into the tax net.
Active Trading That Looks Like a Business
If a church’s investment activity crosses from passive holding into something that resembles running a trading business, the income can become taxable as unrelated business income. Any exempt organization with $1,000 or more in gross income from an unrelated business must file Form 990-T, even though churches are otherwise exempt from the annual Form 990 information return.3Internal Revenue Service. Unrelated Business Income Tax Taxable unrelated business income is taxed at the flat 21 percent federal corporate rate. A church buying and holding funds is not at risk here; a church running a high-volume trading operation might be.
Buying Stocks With Borrowed Money
The second exception is more common and more mechanical. If a church uses borrowed money to buy investments, including through a margin account, the income from those investments becomes partially taxable in proportion to the debt involved.4Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income The formula compares the average debt used to acquire the asset against the average adjusted basis of the asset during the year.
A simplified version: if a church buys $100,000 of stock and finances half with borrowed money, roughly 50 percent of the resulting dividends and capital gains are taxable. The church files Form 990-T and pays tax on that portion. The cleanest way to avoid the issue is to invest only funds the church already holds.
Fiduciary Duties Under UPMIFA
The Uniform Prudent Management of Institutional Funds Act governs how nonprofits, including churches, manage investment portfolios and endowment funds. Forty-nine states and the District of Columbia have adopted some version of it.5Uniform Law Commission. Prudent Management of Institutional Funds Act If a church holds invested assets, the people overseeing them are almost certainly bound by its requirements.
UPMIFA is built on a prudent person standard. Church leaders overseeing investments must act in good faith and use the care a reasonable person would use in a similar role. Decisions are evaluated in the context of the whole portfolio rather than one stock’s performance. Diversification is expected unless the church has a specific, documented reason to concentrate its holdings. Fiduciaries are also expected to weigh inflation, economic conditions, and expected total return from both income and price appreciation.
The act requires qualifying nonprofits to adopt a written investment policy, maintain annual financial reporting, and undergo independent audits. Churches that skip these steps expose their leaders to personal liability if investment losses trace back to negligent management. UPMIFA replaced older rules that restricted the asset types a nonprofit could hold, giving churches broader investment flexibility in exchange for stronger accountability.
What Belongs in an Investment Policy Statement
An investment policy statement is the governance document that turns “we can invest” into a defensible process. Without one, church leaders have no documented framework to show they acted prudently if a congregant or regulator ever questions their decisions. A solid policy for a church should cover, at minimum:
- Investment objectives: whether the portfolio is meant to preserve capital, generate income, or grow over the long term.
- Asset allocation targets: the percentage mix between stocks, bonds, and other asset classes, with acceptable ranges.
- Risk parameters: how much volatility the church can absorb without jeopardizing operations or mission.
- Spending policy: how much can be drawn from the portfolio each year, and how the rate is calculated.
- Roles and authority: who can make investment decisions and execute trades, and what approvals are required.
- Review schedule: how often the board reviews performance and revisits the policy itself.
The IRS encourages nonprofits to pair investment policies with a written conflict of interest policy that requires board members and staff to act solely in the interests of the organization.6IRS. Governance and Related Topics – 501(c)(3) Organizations – Good Governance Practices The policy should include procedures for identifying conflicts and require periodic written disclosure of any financial interest a board member or family member has in entities doing business with the church. When investment decisions are on the table, these protections matter more than usual.
Private Inurement and Excess Benefit Penalties
The tax code flatly prohibits any part of a 501(c)(3) organization’s net earnings from benefiting private individuals who have a personal interest in the organization.7Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. In an investment context, that means church leaders cannot use the portfolio to enrich themselves, their families, or their business associates. Paying a pastor’s relative above-market fees to manage the church’s investments, routing trades through a board member’s brokerage firm at inflated commissions, or using investment returns to fund excessive compensation all count as private inurement.8Internal Revenue Service. Inurement/Private Benefit – Charitable Organizations
The IRS can revoke a church’s entire tax-exempt status for private inurement. Short of revocation, Section 4958 imposes excise taxes on what the IRS calls excess benefit transactions. The person who received the excess benefit owes an initial tax of 25 percent of the excess amount. Any organization manager who knowingly participated in the transaction faces a separate 10 percent tax, capped at $20,000 per transaction. If the person who received the excess benefit does not correct the transaction within the allowed period, the penalty escalates to 200 percent of the excess benefit.9Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions
These penalties apply to anyone who was in a position to exercise substantial influence over the church’s affairs at any point during the five years before the transaction, along with their family members and entities they control. This is the area where church investment programs most commonly run into real trouble, usually because a small board makes informal decisions without documentation or independent oversight.
What a Brokerage Will Ask For
An institutional brokerage account is the practical starting point. The brokerage will need documentation confirming the church’s legal status and identifying who is authorized to trade:
- Articles of Incorporation showing the church is legally organized as a nonprofit under state law.
- An IRS Determination Letter verifying 501(c)(3) status. Churches are not required to apply for one, but many do because it simplifies dealings with financial institutions and donors.1Internal Revenue Service. Churches, Integrated Auxiliaries and Conventions or Associations of Churches
- An Employer Identification Number, used by the brokerage for tax reporting.
- A Corporate Resolution signed by the board authorizing the account and naming the specific individuals empowered to execute trades.
Whoever is named in the corporate resolution should match the people identified in the investment policy statement, and both documents should be updated whenever authorized personnel change.
A Note on Foreign Accounts
If a church invests only through a U.S. brokerage, this does not apply. But a church that holds any financial account outside the United States, where the combined value crosses $10,000 at any point during the year, must file FinCEN Form 114, the FBAR, by April 15 of the following year, with an automatic extension to October 15.10Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) The requirement covers all U.S. persons and entities, tax-exempt organizations included, and penalties for missing the filing can be steep even when the failure is unintentional.