What Tax Strategies Can Help With Concentrated Stock?

Tax strategies for concentrated stock can include spreading sales across multiple tax years, choosing which shares to sell based on cost basis, coordinating gains with changes in taxable income, using capital losses when available, and donating appreciated stock as part of an existing charitable giving strategy. The most appropriate approach depends on your financial circumstances, tax situation, and investment goals. The right strategy should consider both the potential tax consequences of selling and the investment risk of continuing to hold a large position in one company.

You probably didn’t set out to have too much of your wealth invested in one stock. It may have happened gradually.

Maybe you accumulated company stock, Restricted Stock Units (RSUs), or stock options throughout your career. Perhaps you invested in a company years ago and watched the stock appreciate substantially. Or you may have inherited shares or received stock through a business transaction.

Over time, that one position may have grown to represent 20%, 30%, 40%, or more of your investments. You may recognize the need to diversify, but selling highly appreciated stock can create a substantial capital gain.

That can leave you weighing two competing concerns: sell and potentially face a sizable tax bill, or continue holding and leave a significant portion of your wealth dependent on one company.

These decisions can become particularly important as you approach or enter retirement, when realized gains may affect your taxable income, Medicare Income-Related Monthly Adjustment Amount (IRMAA) premiums in a future year, charitable giving strategy, and other financial decisions.

At SGL Financial, our Chicagoland financial advisors help clients evaluate concentrated stock as part of their broader financial and retirement plans. By considering investment management and tax planning together, we can help clients evaluate ways to reduce concentration risk while accounting for the potential tax implications.

Should You Sell a Concentrated Stock Position All at Once?

No. A gradual sale can make more sense when there is no immediate reason to liquidate the entire position. 

Selling a large position in one transaction can result in a significant taxable gain in a single year. Instead, you may be able to sell shares over several tax years and gradually move the proceeds into a more diversified portfolio. Spreading sales over time can help manage when gains are realized, but it does not guarantee a lower overall tax bill and leaves you exposed to the stock’s performance while you continue to hold it.

For example, assume you own $600,000 of a stock with a $100,000 cost basis. Selling the entire position would result in a $500,000 capital gain before accounting for other gains or losses.

As part of our comprehensive tax planning services, our Chicago metro area financial professionals can help you evaluate how much to sell, which shares to consider selling, and when sales may fit your broader financial plan.

Can Selling Stock Over Several Years Help Manage Capital Gains?

Yes. Spreading sales across multiple tax years can help manage the timing of taxable gains.

Long-term capital gains are generally taxed differently from ordinary income, and the rate that applies depends in part on your overall taxable income. That makes year-by-year planning important.

For instance, one year you may have a large bonus, business income, or another taxable event. Another year, your income could decline because you retire, sell a business, or stop receiving certain compensation.

Instead of selling the same dollar amount every December, consider your expected income and other taxable events before determining how much concentrated stock to sell.

Your financial plan should include a multi-year tax and investment strategy, with each potential sale evaluated in the context of your expected income, tax situation, and investment risk.

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Can Selling Concentrated Stock Affect Medicare IRMAA?

Yes. A large taxable gain can increase modified adjusted gross income (MAGI), which may affect Medicare premiums if you are a higher-income retiree.

Medicare uses your total income from the previous two years when determining whether an Income-Related Monthly Adjustment Amount, or IRMAA, applies to Part B and Part D premiums.

That creates another consideration if you are 65 or older.

Suppose you are already close to an IRMAA threshold. Realizing a large capital gain could increase your modified adjusted gross income (MAGI) enough to place you in a higher IRMAA tier, potentially increasing your Medicare premiums two years later.

Remaining heavily concentrated solely to avoid a Medicare surcharge could expose substantially more of your wealth to one company’s performance.

It means that the investment and tax decisions should be evaluated together.

Does Cost Basis Matter When Selling Concentrated Stock?

Yes. Cost basis can materially affect the taxable gain from a stock sale.

If you acquired shares at different times and prices, individual tax lots may have very different unrealized gains. Imagine you own two lots of the same stock:

Selling $100,000 of stock doesn’t necessarily create the same tax result in both cases.

The IRS permits investors to identify specific shares being sold when the identification requirements are satisfied. This generally requires identifying the shares to your broker and obtaining appropriate confirmation. If shares aren’t adequately identified, first-in, first-out rules (an accounting and inventory management rule that assumes the oldest goods purchased or produced are the first ones sold) generally apply.

That makes specific-lot identification an important part of concentrated stock planning.

Depending on your broader strategy, selling higher-basis shares first may allow you to begin diversifying while realizing a smaller gain. The best tax-lot selection will depend on your overall portfolio, current and expected tax situation, and longer-term plans.

But cost basis should not be the only consideration. Holding the lowest-basis shares indefinitely simply because they have the largest embedded gain may leave you with more concentration risk than you intended.

Check out our blog: “How Much Liquidity Should Retirees Keep Available?”

Should You Donate Appreciated Stock Instead of Cash?

Yes, if charitable giving is already part of your financial plan, appreciated securities may be worth considering.

Instead of selling appreciated stock, paying the associated capital gains tax, and then donating cash, you may be able to donate shares directly to a qualified charitable organization or through an appropriate charitable vehicle, potentially avoiding the capital gain that would otherwise result from selling those shares.

The availability and amount of any charitable deduction depend on the type of gift, the receiving organization, how long the shares have been held, and applicable tax rules and limitations. A tax professional can help determine whether donating appreciated shares is appropriate for your circumstances.

This can potentially accomplish two objectives at once:

• Support a charity or cause that matters to you
• Remove appreciated shares from a concentrated position without first selling them

Charitable giving should not be created simply for the tax deduction. But if you already intend to give, the asset you donate can matter. This is where financial advice from Chicagoland fiduciary financial advisors at SGL Financial can be beneficial for your tax planning efforts.

Should You Gift Concentrated Stock to Family?

You can, but gifting stock doesn’t automatically eliminate the tax issue. Here’s why.

When appreciated stock is gifted to another person, the recipient generally receives the donor’s basis for purposes of determining gain, although special rules may apply in certain circumstances. In other words, the embedded gain may travel with the shares rather than disappear.

Gifting can still be appropriate as part of a broader estate or family wealth strategy, but it should be evaluated based on the recipient, your estate plan, current gift and estate tax rules, and the stock’s cost basis.

This is another reason not to treat concentrated stock as an isolated investment decision.

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What Is the Best Tax Strategy for a Concentrated Stock Position?

The best approach is to coordinate diversification with your overall financial and tax picture rather than making decisions based on capital gains alone.

Before selling, consider reviewing the following questions with your financial advisor and tax professional: 

How Does SGL Approach Concentrated Stock Planning?

At SGL Financial, we can help you evaluate how much concentration you have, the tax implications of selling, which tax lots to consider, whether sales should be spread across multiple tax years, and how those decisions fit with your broader financial plan.

With financial planning, investment management, and access to CPA tax preparation under one roof, we can help coordinate your investment strategy with your tax planning needs.

Have a concentrated stock position and aren’t sure what to do next? Before making a major sale, schedule a complimentary meeting with our SGL Financial advisors and planners to discuss your position, potential tax considerations, and the options available to you.

Frequently Asked Questions About Concentrated Stock Tax Strategies

Can I diversify concentrated stock without selling it all at once?

Yes. Diversification does not necessarily require selling an entire concentrated position at one time. Depending on your circumstances, you may be able to gradually sell shares over several tax years, prioritize certain tax lots, or use charitable giving as part of the strategy. The goal is to balance concentration risk with the tax consequences of reducing the position.

How can I reduce capital gains taxes when selling concentrated stock?

There is no single strategy that applies to every investor. Potential approaches can include spreading gains across multiple tax years, selling higher-cost-basis shares first, coordinating sales with years when taxable income is lower, using available capital losses to offset gains, and donating appreciated shares when charitable giving is already part of your plan.

Can capital losses offset gains from concentrated stock?

Yes. Generally, capital losses can offset capital gains, which may make existing losses relevant when deciding when to sell appreciated stock. Tax-loss harvesting and concentrated-stock sales should be evaluated together rather than independently, including applicable tax rules and the investment merits of each decision.

Is retirement a good time to sell concentrated stock?

Retirement may create planning opportunities if your taxable income decreases after you stop working. However, large gains can still affect your taxes and potentially your Medicare IRMAA premiums. Consider your expected income, portfolio withdrawals, Social Security, required minimum distributions, and other sources of income before determining when to sell.

Should taxes be the main factor when deciding whether to sell concentrated stock?

No. Taxes are important, but avoiding a tax bill can leave a substantial portion of your wealth exposed to the performance of a single company. A concentrated-stock strategy should consider both the potential tax cost of selling and the investment risk of continuing to hold the position.

What tax considerations apply to inherited concentrated stock?

Inherited stock may receive a basis adjustment based on its fair market value at the date of death, subject to applicable tax rules and exceptions. This can affect the capital gain or loss if you later sell the shares. However, inheriting a stock does not eliminate concentration risk. Reviewing the shares’ tax basis, their role in your overall portfolio, and your financial goals can help you evaluate whether to continue holding or diversify the position.

What can I do with the proceeds after selling concentrated stock?

After selling shares, you can consider reinvesting the proceeds across different investments based on your financial goals, time horizon, and risk tolerance. Diversification does not mean eliminating risk, but spreading investments across different companies, sectors, and asset classes can reduce dependence on a single holding. Your reinvestment strategy should also account for liquidity needs, taxes, and your broader financial plan.