Tax-Efficiently Diversifying from a Concentrated Stock Position
I recently met with a couple whose net worth was more than 75% tied up in a single stock. They both were employees of the same company and had received stock options as part of their compensation. The stock price had gone up substantially in a few short years, and they had never sold a single share. While it’s a good problem to have, they were very concerned about what to do now.
Given the strong market over the past few years, I’ve met with a growing number of people who are trying to figure out how to sell stock without incurring significant taxes. Here are the most common strategies we discuss.
Gifting
First and foremost, if part of your financial life includes gifting to family members or charity, this should be part of the equation.
Gifting to people: Often, children/grandchildren are going to be in much lower tax brackets, in some cases, 0% federally for capital gains. Instead of gifting cash, gift them the stock, and allow them to sell it at their own tax rates.
Gifting to charity: If you gift to charity regularly, consider gifting the appreciated stock instead of cash. You can even fund multiple years of gifting by transferring stock to a donor-advised fund, and then gifting out of that account over subsequent years.
Dollar-Cost Averaging Over Time
One of the simplest and most effective approaches is to sell gradually over a series of years, rather than all at once.
Mechanics:
Establish a plan to sell a fixed number of shares or a dollar amount each month, quarter, or year.
You can slow sale plans if the stock is in a “hole” after a selloff or accelerate sales if the stock is trading above historical valuations.
Coordinate sales with income levels and tax brackets, selling more in years with lower income can minimize the tax hit.
Use annual capital gains tax exclusions (such as harvesting up to the top of a tax bracket).
This method spreads out the tax liability, avoids “lump-sum regret,” and allows you to systematically diversify into a more balanced portfolio.
The downside here is that you will almost certainly regret it to some degree. If the stock price increases significantly, you will wish you hadn’t sold any, and if it declines, you’ll wish you had sold more.
Exchange Funds
Exchange funds are private investment vehicles that pool together concentrated stock positions from multiple investors. In return, each investor receives a diversified basket of securities.
Mechanics:
Investors contribute their concentrated stock holdings.
After a lock-up period (often 7 years), the fund can distribute a diversified portfolio of stocks back to participants.
No immediate capital gain is recognized at contribution, so immediate diversification is achieved without triggering a taxable event.
These funds also have higher fees than those found in an index fund, so cost is a primary concern when implementing.
Tax-Loss Harvesting (TLH)
If you hold other positions at a loss, you can strategically sell them to offset the gains from selling appreciated shares. But there are also more advanced versions that involve long/short strategies, which can accelerate the active losses to offset gains.
Mechanics:
Traditional TLH: Sell losing positions to offset realized gains from selling part of the concentrated position.
You can implement direct indexing, where you actively manage a basket of stocks, selling positions at a loss and buying back other stocks that are highly correlated.
This requires you to have other capital to invest since there will not be anything to actively TLH if you only own the concentrated stock.
Long/Short Overlay: Hedge fund-like strategies may pair long positions with offsetting short sales or derivatives to create “synthetic” tax losses. These losses can then offset gains, but the structures can be complex and require professional management.
Over time, you're likely to trade a highly appreciated single stock for a basket of highly appreciated stocks. The downside is that it can take years, often 5+, to fully diversify.
Direct Hedging with Options or Collars
For investors who want to hold the stock but reduce downside risk before selling, hedging strategies can be useful.
Mechanics:
A collar involves buying protective put options and selling covered calls. This limits both the downside and the upside, but can create a controlled exit.
Example: Your stock is selling for $100. You sell a call option for $110, which generates income that you use to buy a $90 put option. If the stock goes below $90, you have protected losses. However, if the stock goes over $110, you have to sell the stock for $110.
This can limit overall market growth since you are putting a cap on the upside growth. Because of this, these types of strategies can be useful for short-term timing decisions, but are less helpful for long-term multiple-year plans.
Qualified Opportunity Zone (QOZ) Funds
Opportunity Zone funds allow investors to defer and potentially reduce taxes on capital gains if the proceeds are reinvested into qualifying investments.
Mechanics:
When you sell appreciated stock, you can reinvest the capital gain portion (not the principal) into a QOZ fund within 180 days.
Taxes on that original gain are deferred until 2026 (or you exit the fund, whichever comes first).
If you hold the QOZ fund investment for 10+ years, appreciation in the QOZ investment itself can be excluded from future capital gains tax.
At this point in 2025, you will only be able to defer the gain until 2026. For example, if you rolled a $1mm gain into the fund, you will owe the taxes on that $1mm on your 2026 taxes. However, if the $1mm QOZ fund grows to $2mm over 10 years, you may be able to exclude that additional gain.
While these funds can be powerful tools, they are illiquid and often tied to real estate or private businesses in designated zones, so due diligence is critical.
There are also many legal and tax implications around these funds, so consulting a professional is imperative.
There’s no one-size-fits-all solution for reducing a concentrated position. Oftentimes, a mixture of the above strategies is best. The right path depends on your tax bracket, liquidity needs, charitable goals, and investment horizon.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.