Employees of large publicly-traded companies may find themselves with a significant amount of company stock in their portfolio. While seeing a large gain in stock value can be exciting, it also comes with risks and potential tax implications when selling off the stock. This article explores various strategies for reducing risk and unwinding a concentrated stock position that has experienced significant growth.
The options available to an individual depend on the total value of the company stock in their portfolio. For those with less than $100,000 in company stock, the options may be limited as many investment vehicles are designed for larger sums of money. Long-term capital gains are taxed at a lower rate than standard income, so it is important to calculate potential tax owed on the sale based on your income bracket. Specialized tax strategies may be necessary for those with a combination of income and gains exceeding $500,000.
One option for de-risking and unwinding a concentrated stock position is to sell the stock outright and invest in a diversified portfolio. This results in an immediate tax hit on all gains but helps reduce the risk of having too much of your net worth concentrated in one stock. Working with a tax advisor to sell portions of the stock over a few years may help mitigate taxes, although the portfolio remains at higher risk until fully diversified. It is important to consider potential risks, such as bankruptcy, which could result in a significant loss of value in a concentrated stock portfolio.
Direct indexing is another strategy that involves owning individual stocks to mirror an index, allowing for tax loss harvesting and offsetting gains with losses. This approach is beneficial for those with some sidelined cash or a portion of the concentrated stock that can be sold to generate offsetting losses. Minimums to get started typically range around $100,000 but can vary among fund managers. Securities lending is an option for individuals who do not have cash to sell securities immediately, allowing them to borrow against their portfolio’s value and invest in a strategy like direct indexing.
Stock options and exchange funds are other strategies that can be used to reduce portfolio risk and manage taxation on a concentrated stock position. Stock options can be utilized to generate income and reduce risk, while exchange funds allow investors to pool their stock with others over several years without selling upfront. Involving trusts, such as a Charitable Remainder Trust, may also offer immediate tax benefits and diversification opportunities for those with appreciated stock. It is essential to consult with financial and tax professionals to determine the best strategy based on individual circumstances and financial goals.
