From Concentrated to Diversified Pairing a Rule 10b5-1 Plan with Tax-Loss Harvesting

For many founders, executives, and early employees, a single stock represents the lion's share of their net worth. That position may have created enormous wealth, but holding it concentrated exposes that wealth to the fortunes of one company, one management team, and one set of risks that no amount of conviction can fully diversify away. The instinct to reduce that risk is sound. The execution is where it gets complicated.

Unwinding a concentrated position into a diversified portfolio runs into two distinct obstacles. The first is tax friction: shares accumulated over years often carry a very low cost basis, so selling triggers substantial capital gains. The second, which applies to corporate insiders specifically, is legal and timing risk: directors, officers, and other employees with access to material nonpublic information (MNPI) cannot simply sell whenever they choose without inviting insider-trading scrutiny.

Two tools, used together, address both obstacles. A Rule 10b5-1 trading plan creates a compliant, disciplined framework for selling the concentrated stock over time. Tax-loss harvesting within the new diversified portfolio can be used to generate losses that offset the gains those sales produce. Neither tool is new, but the combination is what makes a multi-year unwind both legally defensible and tax-efficient.

The role of a Rule 10b5-1 plan

Rule 10b5-1 provides an affirmative defense against insider-trading liability under Section 10(b) of the Securities Exchange Act. The idea is straightforward: an insider sets up a written plan to buy or sell company stock on a predetermined schedule at a time when they do not possess MNPI. Once the plan is in place, trades execute automatically according to its terms, even if the insider later comes into possession of material information. Because the decision to trade was made when the insider was “clean,” the trades carry a defense against allegations that they were made on inside information.

For someone trying to diversify out of a concentrated position, this solves a real problem. Insiders are frequently locked out of the market — by blackout windows, by ongoing access to MNPI, or simply by the appearance of impropriety that comes with large discretionary sales. A 10b5-1 plan replaces ad hoc, discretionary selling with a pre-committed schedule, which both protects the insider legally and removes the behavioral temptation to time the market or delay indefinitely.

The SEC tightened the rules meaningfully through amendments that took effect in February 2023. Anyone establishing a plan today should be aware of the current conditions:

• Cooling-off periods. Directors and officers must wait the later of 90 days after adoption, or two business days following disclosure of financial results for the quarter in which the plan was adopted — capped at 120 days. Other employees face a 30-day cooling-off period before trading can begin.

• Good-faith certification. Directors and officers must certify that they are not aware of MNPI and are adopting the plan in good faith, not as a scheme to evade the rules.

• No overlapping plans. Generally, an insider may not maintain multiple overlapping 10b5-1 plans.

• Single-trade plan limit. Reliance on the affirmative defense for a single-trade plan is limited to one per 12-month period.

• Good-faith operation. The plan must be operated in good faith throughout its life — it is not a “set it and forget it” instrument insulated from later conduct.

For control persons and holders of restricted stock, a well-designed plan is typically coordinated with Rule 144, which imposes volume limitations, current-information requirements, manner-of-sale conditions, and Form 144 filings on affiliate sales. The plan's sale schedule can be structured to stay within Rule 144 limits, so the two regimes work in concert rather than tripping over each other.

One important boundary: the 10b5-1 plan governs the sale of the company stock. The reinvestment of proceeds into a diversified portfolio — and the loss harvesting that happens there — is separate ordinary activity that does not require, and is not covered by, the plan.

The role of tax-loss harvesting

Tax-loss harvesting is the practice of selling investments that have declined below their cost basis to realize a capital loss, which then offsets realized capital gains elsewhere. Net capital losses can also offset up to $3,000 of ordinary income per year, with any remainder carried forward indefinitely — but often for a large concentrated unwind, the real value lies in offsetting the substantial gains generated by selling the company stock, not the modest ordinary-income deduction.

The constraint to respect is the wash-sale rule. If you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale — a 61-day window in total — the IRS disallows the loss and instead adds it to the basis of the replacement security. The rule applies across all of your accounts, including a spouse's accounts and IRAs, so household-level coordination matters. In practice, harvesters sidestep the rule by replacing a sold position with a similar-but-not-identical one (for example, swapping one broad-market index fund for another tracking a different index).

This is where the structure of the diversified portfolio matters. A portfolio built from a basket of individual securities — often through a direct-indexing or separately managed account that replicates an index by holding its underlying stocks — produces far more harvesting opportunities than a single index fund. Even in a year when the index rises, individual constituents decline at different times, creating losses that can be harvested while the overall position continues to track the market. A single ETF, by contrast, only shows a harvestable loss when the entire index is underwater.

How the two tools work together

Combining them produces a coordinated, multi-year unwind:

1.     The 10b5-1 plan sells the concentrated company stock on a disciplined, compliant schedule — say, in measured tranches over two to four years. Each sale realizes a (typically long-term) capital gain.

2.     The proceeds are redeployed into a diversified, direct-indexed portfolio.

3.     That portfolio is harvested for losses on an ongoing basis. The realized losses offset the gains generated by the 10b5-1 sales, reducing the net taxable gain in each year of the transition.

The pace of the two activities can be coordinated. Rather than selling the entire concentrated position in one tax year — which would stack a massive gain into a single year and likely push the seller into the top long-term rate plus the 3.8% Net Investment Income Tax — the unwind is spread across multiple years, and each year's gain is partially absorbed by harvested losses. The result is a position that grows steadily more diversified while the tax bill is smoothed and reduced rather than paid all at once.

A simplified illustration

Suppose an executive holds $5 million of company stock with a $1 million cost basis — roughly $4 million of embedded long-term gain — and plans to diversify over four years using a 10b5-1 plan that sells about $1.25 million per year.

In a given year, selling $1.25 million might realize, say, $1 million of long-term gain. At a 23.8% federal rate (20% plus NIIT), that's about $238,000 in federal tax before any offset. If the direct-indexed diversification sleeve harvested $200,000 of losses that year, those losses offset $200,000 of the gain, leaving $800,000 taxable — a federal saving of roughly $47,600 for the year, with additional savings at the state level. Repeated across the unwind, the cumulative deferral and reduction compound meaningfully.

These figures are illustrative only; actual harvesting yields depend on market conditions, portfolio construction, and the path of returns.

Practical considerations and pitfalls

The wash-sale rule can reach the company stock too. Note that the wash-sale rule applies only to losses, so selling the appreciated concentrated stock at a gain never triggers it. But if your diversified index includes the very company you're unwinding, the index sleeve may hold or buy that same stock — creating overlap and potential wash-sale complications when you harvest. Many investors deliberately exclude the concentrated company (and sometimes its sector) from the diversification sleeve to avoid this and to keep reducing, rather than recreating, single-stock exposure.

Holding period and loss character. Long-term losses offset long-term gains first under the netting rules, and short-term losses can be especially useful where short-term or ordinary income is in play. Confirming that company shares are held more than a year before sale generally secures long-term treatment on the gain side.

Harvesting yields decline over time. Generally, as a diversified portfolio appreciates, fewer positions sit below basis, so the supply of harvestable losses naturally diminishes in later years. The strategy front-loads its tax benefit and should be modeled with that decay in mind.

It defers and reduces — it does not eliminate. Harvesting lowers your cost basis in the replacement securities, so gains resurface when those are eventually sold. The benefit is real (deferral has time value, and rate arbitrage is possible), but it is not a permanent escape from the embedded gain.

State taxes can raise the stakes. California, for instance, applies no preferential rate to capital gains and taxes them as ordinary income at rates reaching 13.3%, on top of federal tax. For residents of high-tax states, the combined burden makes both diversification timing and loss harvesting materially more valuable.

Start the plan when you're clean. The entire affirmative defense rests on adopting the 10b5-1 plan when you do not possess MNPI and operating it in good faith. Timing the adoption — and respecting the cooling-off period — is not a formality.

Complementary tools worth considering

Loss harvesting and a 10b5-1 plan form the core of an efficient unwind, but they layer well with other strategies. Donating highly appreciated shares to a donor-advised fund or charity eliminates the gain on the donated shares while generating a deduction. Exchange funds allow some investors to swap a concentrated position into a diversified pool on a tax-deferred basis. Founders holding qualified small business stock (QSBS) may have a gain exclusion available. And lifetime gifting to family members in lower brackets can move some of the gain to a lower rate. Which of these fits depends entirely on individual circumstances.

The bottom line

A concentrated position is a high-quality problem, but it's still a problem. The combination of a Rule 10b5-1 plan and ongoing tax-loss harvesting lets an insider address both halves of it at once — selling the company stock in a way that withstands legal scrutiny and imposes discipline, while systematically offsetting the resulting gains with harvested losses from a diversifying portfolio. Done thoughtfully and over a multi-year horizon, it can turn a single, anxious, all-at-once decision into a measured transition toward a portfolio that no longer rises and falls with one company.

Sources

The regulatory and tax points above draw on the following primary sources, current as of 2026:

• U.S. Securities and Exchange Commission — SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans (Dec. 14, 2022).

• U.S. Securities and Exchange Commission / Investor.gov — Securities Act Rule 144: Selling Restricted and Control Securities.

• Internal Revenue Service — Topic No. 409, Capital Gains and Losses.

• Internal Revenue Service — Publication 550, Investment Income and Expenses (wash-sale rules).

• Internal Revenue Service — Topic No. 559, Net Investment Income Tax.

• California Franchise Tax Board — Capital Gains and Losses.

• U.S. Securities and Exchange Commission — Fact Sheet: Rule 10b5-1 and Insider Trading (Release No. 33-11138).

• Internal Revenue Service — Donor-Advised Funds.

• Internal Revenue Service — Instructions for Schedule D (Form 1040) — Qualified Small Business Stock exclusion.

• Internal Revenue Service — Frequently Asked Questions on Gift Taxes.

This article is provided for educational purposes and does not constitute tax, legal, or investment advice. Rule 10b5-1 plans involve securities-law considerations, and tax-loss harvesting outcomes depend on individual circumstances and current law. Consult your tax advisor, legal counsel, and investment professional before implementing any of the strategies described. Advisory services are offered through Propulsion Capital Management LLC, an Investment Advisor in the State of California. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.