For many investors, a significant portion of their wealth can become tied to one, or a small number of, stock position(s). This may be the result of long-term investing, equity compensation, the sale of a business, or early investment in a high-performing company. While concentrated stock positions can generate substantial wealth, they also introduce heightened portfolio concentration risk and significant tax considerations.
From a portfolio management perspective, excessive concentration undermines diversification, one of the most reliable tools for managing risk. However, selling a large highly appreciated stock position outright can result in significant capital gains taxes and potentially expose the investor to the additional 3.8% Net Investment Income Tax (NIIT). These taxes can erode a meaningful portion of the wealth created in the stock positions.
The good news is that there are thoughtful strategies available to help investors reduce concentration risk while managing taxes efficiently.
Understanding the Risks of Concentration
Investors must first understand why concentrated positions warrant attention. When a large percentage of a portfolio is invested in one stock, performance becomes heavily dependent on the fortunes of that single company. Even highly profitable and well-established companies can face market downturns, regulatory challenges, industry disruption, management changes, and earnings volatility.
While the stock may have performed exceptionally in the past, relying too heavily on it going forward can expose the investor to unnecessary risk. At the same time, many concentrated positions carry low cost bases due to years of appreciation. Selling these shares can generate sizable capital gains taxes, particularly for investors in higher tax brackets. This creates a natural hesitation to diversify.
The challenge is to balance risk reduction with tax efficiency.
Six Strategies to Navigate Concentrated Stock Positions
Gradual and Strategic Selling Over Time:
One of the most straightforward approaches is to reduce the position gradually rather than all at once. By spreading sales over multiple years, investors can:
Manage capital gains tax exposure
Potentially remain in lower tax brackets
Align stock sales with income fluctuations
Take advantage of favorable market conditions
This systematic approach allows investors to steadily reduce concentration risk while maintaining flexibility. In some cases, selling during years of lower income, such as early retirement, can further enhance tax efficiency.
While this strategy does not eliminate taxes, it often results in a lower overall tax burden compared to a large one-time sale that can push the investor’s long-term capital gains tax bracket from 15% to 20%.
Tax-Loss Harvesting:
Tax-loss harvesting involves selling investments that have declined in value to realize capital losses. These losses can then be used to offset capital gains from selling appreciated stock. For example:
Capital losses offset capital gains dollar-for-dollar
Up to $3,000 of capital losses can be used to reduce taxable ordinary income each year
Unused capital losses can be carried forward indefinitely
When coordinated carefully, tax-loss harvesting can significantly reduce the tax impact of diversifying a concentrated position. This strategy requires ongoing monitoring and a well-structured taxable portfolio, but can be a powerful tool when executed properly.
Gifting Shares as Part of Estate and Family Planning:
Gifting appreciated stock to family members or irrevocable trusts can help:
Reduce future estate taxes
Shift tax implications of future appreciation to heirs
Potentially take advantage of lower tax brackets
Annual gift tax exclusions and lifetime exemptions should be used strategically. Additionally, certain trust structures may provide further tax efficiency and asset protection.
It is important to note that heirs typically inherit the original cost basis of the shares, meaning capital gains taxes may still apply when they sell. Regardless, gifting can be an effective long-term wealth transfer strategy when coordinated with broader estate planning. For example, if you have adult children, this strategy can serve a double purpose of transferring wealth, creating more shared experiences with your children, plus potentially reducing estate taxes at the same time.
Utilizing Exchange Funds for Tax-Deferred Diversification:
Exchange funds are specialized investment vehicles that allow multiple investors to pool their concentrated stock positions in exchange for ownership in a diversified portfolio. Key benefits include:
Immediate diversification
No capital gains tax triggered at the time of the exchange (in most structures)
However, exchange funds typically come with high minimum investment requirements, long lock-up periods (often seven years or more), and limited liquidity.
After the lock-up period, investors receive a diversified basket of stocks. Exchange funds can be an effective solution for investors with very large positions who want diversification without immediate tax consequences.
Hedging Strategies Using Options:
Sophisticated investors may use stock option strategies to manage downside risk while deferring a taxable sale of stock. One common technique is a “collar” strategy, which generally involves buying a protective put option to limit downside risk and simultaneously selling a call option to help offset the cost of the protective put.
This creates a range of potential outcomes where the stock is protected from major losses but may also have capped upside potential.
While collars can be effective risk management tools, they take stock option experience to execute and require careful structuring to avoid unintended tax or regulatory consequences. These strategies are typically implemented with the guidance of financial professionals experienced in derivatives and tax planning.
Donating Appreciated Shares to Charity or Donor-Advised Funds:
For charitably inclined investors, donating appreciated stock is one of the most tax-efficient ways to reduce a concentrated position. When shares are donated directly to a qualified charity or Donor-Advised Fund (DAF):
The investor avoids paying capital gains tax on the appreciation
A charitable deduction is generally available for the full fair market value of the shares donated up to 30% of the investor’s Adjusted Gross Income, subject to additional limitations introduced by recent tax law
The charity can sell the stock without tax consequences
Donor-advised funds offer additional flexibility by allowing investors to take an immediate tax deduction while distributing grants to charities over time. For many high-net-worth families, charitable giving becomes a core component of managing concentrated stock risk.
It is important to note that beginning in 2026, the tax deduction benefit of charitable contributions is capped at the 35% tax bracket. For taxpayers in the top tax bracket (37%), the value of their deduction will be roughly 35 cents per dollar donated instead of 37 cents.
The Value of an Integrated Strategy
In practice, the most effective approach often involves a combination of several strategies rather than relying on just one. For example, a RISE Investments advisor may recommend a combination like the following:
Gradual selling over time
Paired with tax-loss harvesting
Alongside charitable donations
And selective hedging for risk management
This coordinated approach allows investors to diversify thoughtfully while keeping taxes under control. However, every investor’s situation is unique. Factors such as income level, tax bracket, investment timeline, charitable goals, liquidity needs, and estate planning considerations all play a role in determining the optimal strategy.
Conclusion
Concentrated stock positions often represent success. Years of growth, smart decisions, or entrepreneurial achievement. However, allowing a single stock position to dominate a portfolio can expose investors to unnecessary risk that could result in derailment of their financial plan.
At the same time, acting too quickly without considering tax consequences can significantly reduce long-term wealth. With careful planning and the right guidance, it is possible to:
Reduce concentration risk
Improve portfolio diversification
Preserve after-tax returns
Align investments with long-term financial goals
In our opinion, proactive management of concentrated positions is one of the most important steps investors can take to protect and grow their wealth over time. A thoughtful, tax-aware strategy can help ensure that the success of yesterday does not become the risk of tomorrow.
Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information. Please note, this article is for education purposes and should not be treated as tax or legal advice. This article is not a substitute for legal or tax advice from your professional legal or tax advisor.