Managing a Concentrated Stock Position Without Triggering a Tax Avalanche

Years of vesting and a rising share price can leave a Silicon Valley household with most of its net worth in a single company. Here are the tools people use to diversify thoughtfully.

It is a familiar situation in the Bay Area. An engineer joins a company, collects equity through several grants, the stock performs well, and a decade later a single ticker represents 60%, 70%, or more of the family's investable assets. The paper wealth is real, but so is the risk. Your salary, your unvested equity, and your investment portfolio all depend on the same company. Diversifying is sensible, yet a large embedded gain makes an outright sale expensive, especially in California.

The tax cost of selling

For 2026, the federal long-term capital gains rate reaches 20% for single filers with taxable income above $545,500 and married couples above $613,700, per the Kiplinger capital gains guide. The 3.8% net investment income tax applies above $200,000 and $250,000 of modified adjusted gross income, respectively, thresholds that the IRS notes are not indexed for inflation. California adds its ordinary income rates on top, with no preferential treatment for long-term gains. For a high earner, the combined marginal rate on a large gain can exceed 35%.

That cost is a reason to plan carefully, not a reason to hold indefinitely. The following approaches are commonly considered, often in combination.

Staged selling

The simplest method is to sell in tranches over several tax years. This spreads the gain, may keep some income below rate thresholds, and reduces the risk of selling everything at a poor price. For insiders, a Rule 10b5-1 plan can formalize the schedule. Selling highest-basis lots first, where the plan administrator allows specific lot identification, can reduce the gain per share sold.

Tax-loss harvesting and direct indexing

Losses realized elsewhere in a portfolio can offset gains from selling concentrated stock. Direct indexing, in which an investor owns the individual stocks of an index rather than a fund, creates more opportunities to harvest losses at the position level while maintaining broad market exposure. Harvested losses can then be applied against gains as the concentrated position is reduced. The wash sale rule, explained in Schwab's primer, disallows a loss if a substantially identical security is purchased within 30 days before or after the sale, and it applies across all of your accounts, including IRAs and a spouse's accounts.

Exchange funds

An exchange fund is a partnership into which multiple investors contribute concentrated positions in different companies in exchange for units of a diversified pool. Because the contribution is generally structured under Section 721 of the tax code, it does not trigger immediate capital gains. As described in Kitces.com's overview of exchange funds, investors typically must remain in the fund for seven years to receive a diversified basket of securities on exit, the fund must hold a portion of its assets in qualifying assets such as real estate, and participation is generally limited to accredited investors or qualified purchasers. Fees, illiquidity, and the quality of the other contributed stocks are important considerations.

Charitable strategies

Donating appreciated shares held more than one year to a public charity or donor-advised fund can allow a deduction for fair market value while avoiding the capital gain on the donated shares. For those with philanthropic intent, this can be an efficient way to reduce a position. Beginning in 2026, itemized charitable deductions are subject to a floor of 0.5% of adjusted gross income, and the benefit for top-bracket taxpayers is capped at 35%, according to Greenberg Traurig's summary of the new rules.

Hedging and other structures

Options-based collars, prepaid variable forward contracts, and charitable remainder trusts are also used in certain circumstances. Each has its own tax rules, costs, and, for company insiders, potential restrictions under company policy or securities law. These are specialized tools that require coordination among your adviser, tax professional, and, where applicable, corporate counsel.

A framework rather than a formula

There is no single correct level of concentration. A reasonable starting point is to ask what would happen to your financial plan if the stock fell by half and stayed there. If the answer is that your goals would still be intact, you have more latitude. If not, the cost of taxes may be a fair price for reducing that risk. This article is educational and does not constitute investment or tax advice; diversification does not ensure a profit or protect against loss.

Important Disclosures

Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.