Diversifying Concentrated Stock Without a Tax Surprise

Editor’s Note: We are not tax advisors, and we do not give tax advice. Please review any investment decision you are considering with a qualified tax professional.

Somewhere along the way, a single stock position became the center of gravity for the entire portfolio. Maybe it was founder’s equity, maybe it was decades of employer stock through a retirement plan, maybe it was a family holding passed down with an unspoken expectation that it stay put. Whatever the origin, the position grew large enough that it stopped behaving like an investment and started behaving like a liability.

Most affluent households know this intellectually. Fewer act on it, because the obvious first question is also the most paralyzing one: What happens to my tax bill the moment I start selling? That hesitation is understandable, and it’s also the reason concentrated positions tend to stay concentrated for far longer than anyone intended.

Why Do Families Hold Onto Concentrated Stock Longer Than They Should?

Q: If the risk is so well understood, why don’t more people just diversify?

A: Because the alternative feels worse in the moment. Selling a large position means recognizing a large gain, and recognizing a large gain means writing a check to the IRS that feels avoidable. So the decision gets deferred. Add in loyalty to a company someone helped build, or a sense that the stock has “always” performed well, and deferral starts to look like a strategy rather than what it actually is, which is a decision by default.

There’s also another reason beneath the surface. Once a position has appreciated significantly, families sometimes start to feel that selling any of it would be an admission that the concentration was a mistake. It wasn’t a mistake. It was often the mechanism that built the wealth in the first place. The mistake, if there is one, is treating the thing that got you here as the thing that should carry you forward indefinitely.

What Are the Main Ways to Reduce Concentration Without an Immediate Tax Bill?

Q: Is there a way to lower concentration risk without triggering an enormous tax event all at once?

A: Usually, and the toolkit is broader than most people expect. The most straightforward approach is a staged sale, selling a defined percentage of the position over multiple tax years rather than all at once. It’s simple to execute and spreads the gain recognition out, though it still leaves the unsold portion exposed to the stock’s day-to-day volatility while the plan plays out.

Beyond gradual selling, there are a handful of structural tools worth understanding. Exchange funds let you contribute concentrated shares into a pooled vehicle in return for a diversified interest, often without an immediate taxable sale, though they typically require accredited investor status and a multi-year lock-up. Charitable vehicles like donor-advised funds allow highly appreciated stock to be gifted directly, avoiding the capital gain on the donated shares while supporting philanthropic goals, though the shares no longer belong to you once transferred. Options-based collars, buying a protective put and selling a call to help fund it, can narrow the range of outcomes on the stock you continue to hold, though they cap upside and can be costly to implement in volatile markets. Some households have also encountered prepaid variable forward contracts, an older structure that pairs a collar with an upfront cash payment. They’re worth knowing about, though the strategies discussed here are built differently and are not prepaid variable forwards. None of these is universally appropriate. The right combination depends on the size of the position, the cost basis, liquidity needs, and how much complexity a household is willing to take on, and it’s a conversation for a qualified tax professional and advisor working from actual numbers.

Q: What if someone wants to keep the stock rather than sell any of it?

A: That’s a legitimate starting point, and there are ways to work with a concentrated position rather than against it. A covered call approach sells call options against the shares you hold to generate income, which can create a modest cushion in flat or declining markets, though it limits participation if the stock rallies hard.

For households who want to keep ownership and also unlock liquidity, a more involved structure combines an options collar with a portfolio margin loan against the position, allowing access to a portion of the stock’s value without an outright sale. There are also financing structures built entirely from options markets, sometimes called box spreads, that can generate cash proceeds today with a known repayment amount later, again without selling the underlying shares. These approaches keep you invested in the original company and can defer the tax question, but they introduce their own complexity: financing costs, margin risk if the stock declines sharply, and the reality that borrowing against a concentrated position doesn’t reduce the underlying company-specific risk; it just changes how you’re exposed to it.

How Does Tax-Loss Harvesting Fit Into a Diversification Plan?

Q: Is there a way to generate tax offsets while diversifying, rather than just paying the bill?

A: This is where a long/short tax-loss harvesting approach can be useful alongside the strategies above. Instead of a traditional long-only portfolio, a long/short manager systematically realizes losses on individual positions while maintaining similar overall market exposure, replacing sold holdings with comparable ones to stay invested. Over time, this builds a pool of realized losses that can be used to offset the gain recognized when the concentrated stock is eventually sold.

It’s worth being precise about what this does and doesn’t accomplish. The losses have to come from somewhere, and a strategy designed to generate them will also generate offsetting gains elsewhere in the portfolio as markets move. Nothing here makes the underlying tax liability disappear. What it can do is shift when and how that liability gets paid, letting you sell the concentrated position on a timeline that makes sense for your goals rather than one dictated purely by the tax hit. It’s a timing and sequencing tool more than a tax elimination tool. Results depend on market conditions, holding periods, and each household’s broader tax picture, and neither this firm nor its Optic Asset Management division provides tax advice. This is a strategy best evaluated with a qualified tax professional before implementation.

What Should Come First, Tax Efficiency or Risk Reduction?

Q: Isn’t the whole point to minimize taxes? Shouldn’t that drive the plan?

A: This is where we’d push back a little. Tax efficiency matters, but it’s a constraint on the plan, not the purpose of it. The purpose is to protect the family’s long-term financial security from the risk of being overly dependent on one company’s fortunes. If tax minimization becomes the primary goal, it’s easy to end up holding a position far longer than is prudent simply because selling never looks tax-optimal in the moment. There’s rarely a perfect year to sell. There’s often a reasonable one.

A useful way to reframe it: the cost of diversifying is visible and immediate, in the form of a tax bill. The cost of staying concentrated is invisible and deferred, in the form of risk that only shows up when something goes wrong. Both are real costs. Only one of them sends you a statement.

Conclusion

The families who navigate this well tend to share one trait. They stop asking “how do I avoid the tax” and start asking “what’s the most I’m willing to risk on one outcome, and what combination of tools gets me there.” Once that question is answered honestly, the tax planning becomes a matter of execution and sequencing, choosing among gradual selling, options-based structures, charitable giving, and tax-loss harvesting, rather than a reason to keep waiting.

If a concentrated position has been sitting untouched for years while you tell yourself you’ll deal with it eventually, that’s usually the moment to bring in someone who can look at the whole picture and build an actual plan instead of another reason to wait.

FAQ

Q: What counts as a “concentrated” stock position?
A: There’s no single legal threshold, but many advisors start paying closer attention once a single security represents somewhere between 10% and 20% of a household’s investable assets. Above that, the position starts to meaningfully drive the portfolio’s overall risk rather than simply contribute to it.

Q: Do I have to sell my stock to diversify?
A: Not necessarily. Strategies built around options collars and portfolio margin can allow you to retain ownership, continue receiving dividends, and access a portion of the position’s value for other purposes, while still working toward diversification over time. These structures involve their own costs, fees, and risks, including the possibility of margin calls if the stock declines, and are not appropriate for every investor or every account type.

Q: Is a prepaid variable forward the same thing as these strategies?
A: No. Prepaid variable forwards are a separate type of structure, and the strategies discussed here are built differently, though they address a similar goal of generating liquidity from a concentrated position without an outright sale. Anyone considering either approach should have a tax professional review the specific mechanics before moving forward.

Q: How does tax-loss harvesting help if I eventually want to sell my concentrated stock?
A: A long/short tax-loss harvesting strategy run alongside the rest of the portfolio can accumulate realized losses over time that may offset the gain recognized when the concentrated position is sold. Those losses are generated alongside offsetting gains elsewhere in the portfolio, so the benefit tends to be in the timing and character of your tax liability rather than a reduction in taxes overall. Availability and usefulness of harvested losses depend on individual circumstances, holding periods, and current tax law. Neither this firm nor its Optic Asset Management division provides tax advice, and this should be discussed with your own tax advisor.

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This content is for informational purposes only and does not constitute financial, tax, or legal advice. Investment strategies involve risk and may not be suitable for every investor. Please consult your financial advisor, tax professional, or attorney regarding your specific situation. Watts Gwilliam & Company, LLC is a Registered Investment Advisor with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training.