The first option is correct.
How much truer and kinder an act of giving is when one gives away what you need.
To paraphrase, "giving is kind and true, but it is much truer and kinder when giving away something you need."
I'm not sure what the construct is called, but it's turning the question "how much kinder is it to do X instead of Y?" into a statement, "how much kinder it is to do X." This is a more emphatic way to say "It is kinder to do X instead of Y."
"How kind it is to do X" is also valid. The much is only required when using the comparative form, kinder, to note that X is kinder than Y.
A Google Ngram supports this option.