If you’re sitting on a large, appreciated holding in one company, the tax code offers several concentrated stock position tax strategies that can cut, defer, or in some cases eliminate the capital gains bill as you diversify. Which one fits depends on your cost basis, your time horizon, your income, whether the shares are public or private, and how much single-company risk you’re willing to carry while you unwind. Federal long-term capital gains rates run from 0% to 20%, a 3.8% surtax can sit on top, and state taxes push the combined rate above 35% in high-tax states. On a multimillion-dollar position, the choice of strategy is easily worth six or seven figures.
When a Position Is Concentrated Enough to Act On
Most financial professionals flag a holding as concentrated once it exceeds 10% to 20% of your investable assets. At that point, one company’s earnings misses, regulatory news, or sector rotations drive your portfolio’s results. A diversified basket of 500 large-cap stocks might swing 15% to 20% in a rough year. An individual stock can drop 40% or more on a single event. Measuring the position against your liquid net worth, not total net worth including your home, gives you a truer read on exposure.
That risk sets up the central tension in every plan below. Selling fast means paying taxes fast. Selling slowly means carrying single-stock risk longer. Every strategy here is really a way of trading one against the other.
The Tax Bill You’re Trying to Reduce
Under Section 1222, gains on shares held one year or less are short-term and taxed at ordinary rates. Long-term gains, on shares held longer than a year, are taxed at 0%, 15%, or 20% depending on your taxable income. For 2026 single filers, the 20% rate begins at taxable income above $545,500; for married couples filing jointly, the threshold is $613,700.
High earners also owe the 3.8% net investment income tax under Section 1411 on the lesser of net investment income or the amount by which modified AGI exceeds $200,000 single or $250,000 joint.1Office of the Law Revision Counsel. 26 U.S.C. 1411 – Imposition of Tax Those thresholds are not indexed for inflation. Stacked together, the top federal rate on long-term gains reaches 23.8%. Most states tax capital gains as ordinary income, adding up to 13% or more.
Your taxable gain is the sale price minus your cost basis. For shares held for decades or received early at a startup, that basis can be a small fraction of current value, and a full sale realizes almost the entire market value as gain. Inherited shares are the exception: under Section 1014, basis resets to fair market value at the date of death, so appreciation during the decedent’s lifetime escapes tax entirely.2Office of the Law Revision Counsel. 26 U.S.C. 1014 – Basis of Property Acquired From a Decedent If you inherited your concentrated position, the diversification math is very different from someone with near-zero basis.
One more federal rule shapes any plan involving loss harvesting alongside sales. The wash sale rule under Section 1091 disallows a loss if you buy substantially identical securities within 30 days before or after the sale.3Office of the Law Revision Counsel. 26 U.S.C. 1091 – Loss From Wash Sales of Stock or Securities A broad market index fund is generally different enough; a sector ETF that closely mirrors what you sold is a closer call, and the IRS has not published bright-line guidance beyond identical securities.
Staged Selling Across Tax Years
The simplest lever is spreading sales across multiple years to keep each year’s realized gain below the threshold where a higher long-term rate applies. Staying under the 20% breakpoint saves five percentage points on every dollar above it, plus the NIIT differential, plus whatever your state’s brackets do at similar income levels. On a large position, keeping several years of gains at 15% instead of 20% is real money.
The cost is time. A five- to ten-year unwind leaves you exposed to company-specific risk the entire way. If the stock falls 50% in year two, you’ve paid tax on shares already sold while the remaining shares halved. Staged selling works best when your basis is not extremely low and when you can tolerate the risk of holding for years.
Exchange Funds
An exchange fund lets you swap your concentrated shares for a proportional interest in a diversified pool of stocks contributed by other investors in similar situations. Under Section 721, contributing property to a partnership in exchange for a partnership interest does not trigger gain recognition.4Office of the Law Revision Counsel. 26 U.S.C. 721 – Nonrecognition of Gain or Loss on Contribution The fund is structured as a partnership to use this rule. You hand over appreciated shares, receive diversified units, and owe no tax at contribution.
The trade-offs are real. A lock-up period of roughly seven years applies before you can redeem, and the fund must allocate at least 20% of its assets to illiquid investments like real estate to satisfy the underlying tax rules. Minimums often start at $1 million, and management fees are meaningful. For someone with near-zero basis, the deferral typically outweighs those costs. For someone whose basis is already close to market, an exchange fund is expensive relative to what it saves.
Qualified Small Business Stock
If your concentrated position is in a qualified small business, Section 1202 may let you exclude a substantial portion of the gain from federal tax entirely. For stock acquired after September 27, 2010 and held at least five years, the exclusion can reach 100% of the gain, capped at the greater of $10 million or ten times your adjusted basis in the stock.5Office of the Law Revision Counsel. 26 U.S.C. 1202 – Partial Exclusion for Gain From Certain Small Business Stock The company must be a domestic C corporation with gross assets not exceeding $50 million at the time the stock was issued, and it must meet active business requirements. More recently acquired stock may qualify for a higher $15 million per-issuer limit under the revised statute.
For founders and early employees at startups that grew large, this is often the single most valuable option available. Confirm eligibility with a tax professional before planning your exit; the requirements are specific and one failed test can eliminate the exclusion.
Charitable Routes That Cut the Tax and the Position
If part of your wealth is going to charity anyway, funding those gifts with your most appreciated shares rather than cash is one of the most efficient moves in the code. Three vehicles handle most situations.
Direct donation of appreciated shares. Give long-term appreciated stock straight to a qualified charity, deduct the fair market value, and neither you nor the charity pays capital gains tax on the appreciation. The deduction for appreciated property is limited to 30% of AGI, with a five-year carryforward for unused amounts. Every dollar donated this way effectively redirects money that would have gone to capital gains taxes.
Donor-advised fund. Contribute appreciated shares to a DAF, take an immediate deduction of up to 30% of AGI, and let the fund sell tax-free and hold the proceeds while you recommend grants over time. There’s no income stream back to you, and the contribution is irrevocable. A DAF works well when you want to eliminate a chunk of concentrated stock quickly and retain flexibility over which organizations receive grants.
Charitable remainder trust. A CRT is more involved. You transfer appreciated stock into an irrevocable trust, which sells the shares without owing capital gains tax at the trust level under Section 664.6Office of the Law Revision Counsel. 26 U.S.C. 664 – Charitable Remainder Trusts The trust reinvests the full proceeds and pays you an income stream for a term of years or for life, with the remainder going to a designated charity. You get an upfront deduction for the present value of the charitable remainder, the trust reinvests the full pre-tax amount, and capital gains still reach you eventually through the distribution stream but spread across many years. You give up the principal permanently in exchange.
Hedging Without Triggering a Sale
When you don’t want to sell but want to reduce risk, options can lock in a range of outcomes. An equity collar pairs a purchased put (a floor under your stock) with a sold call (a cap on your upside), often structured so the premiums roughly offset. You keep the shares, protect against a major drop, and give up gains above the call strike.
The tax trap is Section 1259. The constructive sale rules treat you as if you sold the stock, recognizing all built-in gain, if you enter into a forward contract to deliver a “substantially fixed” amount of property at a “substantially fixed” price. Short sales against the box and certain offsetting contracts trigger the same rule.7Office of the Law Revision Counsel. 26 U.S.C. 1259 – Constructive Sales Treatment for Appreciated Financial Positions A collar with a very narrow spread between the put and call strike prices starts to look like a fixed-price forward and can cross the line. Practitioners keep enough spread between the strikes to preserve meaningful economic risk and reward, but no statutory safe harbor tells you exactly how wide is wide enough.
A prepaid variable forward contract goes further. You receive cash now in exchange for a promise to deliver a variable number of shares at a future date. Because the share count fluctuates with price, a properly structured contract avoids the “substantially fixed” language and defers gain until settlement. If the stock falls enough that share delivery becomes effectively fixed, though, the Tax Court has found that gain recognition is triggered. Rolling or extending an existing contract can also create a taxable event if the IRS views it as terminating the original obligation. These are sophisticated instruments and require ongoing monitoring after they’re put in place.
Diversifying Around the Position: The Completion Portfolio
A completion portfolio doesn’t touch your concentrated stock at all. Instead, you build the rest of your holdings specifically to offset its risk characteristics. If your position is a large-cap technology company, you overweight healthcare, energy, financials, and other sectors while underweighting tech. The combined portfolio behaves more like a broad market index even though one large single-stock exposure remains. This avoids any tax event but requires enough other capital to meaningfully dilute the concentration.
Extra Rules If You’re a Corporate Insider
Directors, officers, and large shareholders face securities rules on top of the tax rules. SEC Rule 144 caps sales during any three-month period at the greater of 1% of the outstanding shares of the same class, or the average weekly trading volume over the four weeks before you file a Form 144.8U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities For thinly traded stocks, that 1% ceiling may be the only measure available. An insider with a large position cannot dump the shares in a single quarter, so any tax strategy that assumes speed of execution may collide with volume limits.
Prearranged trading plans under Rule 10b5-1 let insiders sell on a set schedule without exposure to insider trading allegations, provided the plan is adopted when you don’t hold material nonpublic information and specifies amounts, prices, and dates, or a formula that removes your discretion. A cooling-off period must pass before any trade executes: at least 90 days for directors and officers, and up to 120 days depending on when the company’s next financial results are disclosed. Non-officer employees have a 30-day cooling-off period.9eCFR. 17 CFR 240.10b5-1 – Trading on the Basis of Material Nonpublic Information The plan must be entered in good faith. The rules tightened significantly in 2023, so an older plan may not satisfy the current standard and should be reviewed before you rely on it.
One Boundary Worth Knowing
Installment sales under Section 453 spread gain recognition across the years you receive payments, which can keep you in lower brackets and defer the total bill. The statute explicitly excludes publicly traded securities: sales of stock traded on an established market require gain recognition in the year of sale.10Office of the Law Revision Counsel. 26 U.S.C. 453 – Installment Method If you’re negotiating the sale of a private company, exploring installment structure before accepting an all-stock deal from a public acquirer matters, because converting to public shares closes that door permanently. For anyone whose concentrated position is already publicly traded, installment treatment isn’t available.