Concentrated Stock Position? 4 Strategies to Consider
Concentrated Stock Position? 4 Strategies to Consider
It’s not uncommon for investors to find themselves heavily concentrated in a single stock—often from years of working at a company, receiving stock-based compensation, or simply holding on to a winning investment. While it can be exciting to watch the value climb, concentration also brings significant risk. A single company’s stock can fluctuate dramatically, and relying too heavily on it may jeopardize your long-term financial goals.
If the stock is in a tax-advantaged account like an IRA, there is no problem. You can simply sell at any time you choose and diversify. But in a taxable account, selling to diversify can mean triggering large capital gains taxes. Fortunately, there are several strategies to manage this risk while being thoughtful about taxes. Let’s explore four of them.
Pair Gains with Losses (Tax-Loss Harvesting)
One of the most straightforward ways to reduce the tax hit is to pair your gains with losses elsewhere in your portfolio. This process, known as tax-loss harvesting, allows you to sell an underperforming investment at a loss to offset the gains realized when selling part of your concentrated stock position.
For example: suppose you sell $100,000 worth of shares with an $80,000 gain. If you happen to have another stock in the portfolio with an $80,000 loss, selling that and realizing that loss can offset the gain. Even if you don’t have enough losses to fully offset the gain, every dollar of realized loss reduces your taxable income from capital gains.
This is a strategy that works best with ongoing portfolio management, as losses may not always be available exactly when you want to sell.
Donate Appreciated Stock to Charity
If you’re charitably inclined, donating appreciated stock can be one of the most tax-efficient moves available. Instead of selling the stock and paying capital gains taxes, you can transfer the shares directly to a qualified charity.
The benefits are twofold:
Avoid the capital gains tax entirely.
Receive a charitable deduction (subject to IRS limits) for the fair market value of the stock at the time of the gift.
This strategy works especially well if you were already planning to give cash to a charity. By donating stock instead, you preserve cash for other uses while also reducing your tax bill. For larger donations, a donor-advised fund (DAF) can make the process simple and allow you to distribute the gifts to charities over time.
Hold Until Death for a Step-Up in Basis
Another powerful (though longer-term) strategy is simply holding the stock until you pass away. Upon passing, most assets in a taxable account receive a step-up in cost basis. This means your heirs inherit the stock at its fair market value on the date of death, effectively wiping out any unrealized capital gains.
For example, if you bought ABC stock at $10 a share and it’s worth $200 at the time of your death, your heirs’ new cost basis becomes $200. They could sell immediately and pay little or no tax.
Although this method resolves the tax problem, it doesn’t solve the concentrated risk problem. If you hold a stock for years or decades with the intention of passing it on to your heirs, the risk will remain high, and if the company falters in that time period, you may end up passing along significantly less than you intended to. Taxes should always be a part of investment decisions, but never should the entire decision be based on taxes.
Gradual Diversification (Sell Over Time)
Another option is to sell your concentrated stock gradually, spreading the tax burden over several years. This might mean setting a plan to sell a fixed dollar amount or percentage of the stock each year.
The benefits:
You manage the risk of holding a concentrated position.
You can potentially take advantage of lower-income years or harvest losses in future years to offset gains.
You avoid triggering a massive one-time tax bill.
Options Strategies (Preview)
The above are 4 straight forward ways to begin reducing your concentrated stock position without incurring a gigantic tax bill. For more sophisticated investors, certain options strategies can be used to create losses or hedge a concentrated stock position. These techniques may allow you to offset gains while maintaining economic exposure to the stock—or they can help reduce downside risk without selling shares outright.
I’ll cover these strategies in detail in a separate blog. For now, just know that they exist as a more advanced toolset, and they require careful planning to execute properly.
Final Thoughts
A concentrated stock position can be both a blessing and a curse. While it’s nice to benefit from a strong performer, diversification is critical to protect your long-term financial security. Whenever someone is certain the particular stock they own is too strong to ever have a significant or permanent drop in price, I simply remind them that many felt the same way about Enron and Lehman Brothers.
This isn’t said to scare you away from a stock you believe in, it’s simply a matter of not carrying any more risk that you need to.
The strategies outlined—tax-loss harvesting, charitable donations, step-up in basis, and gradual diversification —each have their place depending on your personal goals, tax situation, and timeline.
I will soon cover using options as a more advanced strategy to reduce concentration risk while minimizing your tax bill.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
