You may hold a concentrated stock position if you’ve built wealth through stock options, equity compensation, or a successful long-term investment. That can be both a benefit and a burden.
The upside is obvious: a significant gain.
The downside is the risk of overexposure to a single company and the potential tax hit if you try to diversify.
Fortunately, innovative ways exist to manage this challenge without setting off a significant tax liability.
Let’s take a closer look.
WHY CONCENTRATED STOCK POSITIONS CAN BE RISKY
Holding onto a stock performing well might seem like a good idea. But when one stock makes up too much of your portfolio, you expose yourself to company-specific risk. Your portfolio can take a disproportionate hit if that company suffers a significant setback.
You may also face emotional barriers to selling. These might include loyalty to your employer, fear of missing out on future gains, or reluctance to trigger taxes. These concerns are valid, but it’s worth looking at the big picture.
THE TAX TRAP OF SELLING ALL AT ONCE
Selling a large position can mean realizing significant capital gains. Those gains are taxable. If your income is high enough, you might face the 20% long-term capital gains tax rate, plus the 3.8% net investment income tax.
Selling all at once can also push you into a higher tax bracket, increase your Medicare premiums in future years, and impact deductions or credits.
But keeping the stock exposes you to risk. So, how do you reduce your position without triggering a major tax event?
Here are some strategies that can help.
DONATE APPRECIATED STOCK TO CHARITY
Donating shares directly to a qualified charity or donor-advised fund (DAF) is one of the most tax-efficient ways to reduce a concentrated position. You get a charitable deduction for the stock’s fair market value and avoid paying capital gains tax on the appreciation.
This works particularly well if you’re already charitably inclined. You can contribute a portion of your holdings each year to manage your taxes and portfolio risk.
USE A DONOR-ADVISED FUND (DAF)
A donor-advised fund is like a charitable investment account. You contribute the stock, get the immediate tax deduction, and then decide how to grant funds to charities over time. This gives you flexibility, especially if you want to bunch multiple years’ worth of donations into one tax year.
You can also use a DAF to pre-fund your charitable giving for retirement while managing a significant stock position before you stop working.
CREATE A PLAN FOR GRADUAL DIVERSIFICATION
Selling in stages over time can spread out your tax liability. This can be done through a structured selling plan, like a 10b5-1 plan, which automates sales and helps avoid emotional decision-making or the perception of insider trading if you’re an employee.
This kind of plan can be beneficial if your stock is still subject to trading windows or blackout periods.
If you have underwater investments, you may be able to sell them to harvest losses. These losses can offset the gains you realize from selling your concentrated stock. If your losses exceed your gains, you can deduct up to $3,000 of the excess against other income and carry forward the rest.
This strategy is most effective in years when markets are volatile or other parts of your portfolio have declined.
USE A CHARITABLE REMAINDER TRUST (CRT)
A charitable remainder trust lets you transfer appreciated stock into an irrevocable trust. The trust sells the stock, reinvests the proceeds, and pays you (or someone else) income for life or a set number of years. When the trust ends, the remaining assets go to charity.
You defer capital gains on the stock’s sale and receive a partial charitable deduction in the year of the gift.
The income you receive from the trust is taxable and may be treated as a combination of ordinary income, capital gains, tax-exempt income, or return of principal, depending on how the trust’s investments perform. Most recipients find that a significant portion is taxed as ordinary income.
This approach can help reduce taxes, generate income, and support philanthropy, all within one strategy. It is more complex than other options, so work with professionals to determine whether it is a good fit for your goals.
BORROW INSTEAD OF SELLING
If you need liquidity but want to avoid selling and triggering taxes, borrowing against your concentrated position may be an option. Some brokerage firms offer securities-backed lines of credit where your investment portfolio is collateral.
This is a risky strategy. If the stock’s value drops significantly, you may face a margin call. However, in the right circumstances, it can be a way to access cash without selling the stock.
CONSIDER AN EXCHANGE FUND
An exchange fund allows you to pool your concentrated stock with other investors who are in a similar situation. The fund holds a diversified basket of stocks. You contribute your stock to the fund and receive a diversified portfolio in return after a holding period (often seven years).
There’s no immediate tax on the contribution. You’ll owe capital gains tax only when you sell the shares of the diversified portfolio. These funds are typically available only to accredited investors and may require a high minimum investment.
MAXIMIZE YOUR COST BASIS
If you inherit appreciated stock, your cost basis is typically stepped up to the fair market value on the date of death.
That means you or your heirs could sell with little or no capital gains tax.
If your concentrated position includes Qualified Small Business Stock (QSBS), you may qualify for significant capital gains exclusions. The One Big Beautiful Bill Act, passed in 2025, expanded QSBS rules. For stock issued after July 4, 2025, you can now exclude:
- 50% of the gain if held for 3 years
- 75% if held for 4 years
- 100% after 5 years
The law also increased the per-issuer gain exclusion from $10 million to $15 million and raised the company asset cap from $50 million to $75 million.
If your concentrated position is in a company that qualifies, it may make sense to hold until you reach one of these key milestones. This could dramatically reduce your tax bill upon sale.
Talk to a tax advisor to see if QSBS applies to your situation.
If you’re considering legacy planning, depending on your financial situation and risk tolerance, it might make sense to hold onto highly appreciated stock until death.
Another approach is gifting low-basis stock to family members in lower tax brackets, though the “kiddie tax” and gifting limits need to be considered.
RELOCATE TO A TAX-FRIENDLY STATE
Some states have no capital gains tax. If you’re planning a move anyway, timing the sale of a concentrated position after establishing residency in a tax-friendly state could save you a significant amount in state taxes.
Keep in mind that states often apply strict rules to determine your residency, and tax authorities may challenge your move if they believe it was primarily for tax avoidance.
WORK WITH AN ADVISOR AND A CPA
Managing a concentrated stock position involves tax planning, investment strategy, and sometimes estate planning.
A coordinated approach can help you avoid costly mistakes.
An experienced financial advisor can build a plan for diversifying your portfolio gradually while keeping your long-term goals in focus. A tax professional can help identify the best strategies for your specific tax situation. Ideally, try to find someone with both credentials.
FINAL THOUGHTS
Holding a concentrated stock position doesn’t have to mean exposing yourself to unnecessary risk or facing a massive tax bill. With the proper planning, you can start to diversify while thoughtfully managing your tax exposure.
Disclaimer: 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. Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.