A lot of wealth gets built by holding one thing for a long time. A career’s worth of employer stock, accumulated grant by grant through equity compensation. A founder’s shares from a company that worked out. An investment, made decades ago, that quietly became the largest line on the balance sheet. By the time someone is in their fifties or sixties, it’s common for an outsized share of an investment portfolio to sit in a single stock.
And that creates a genuinely hard problem — one with no clean answer, because two real concerns are pulling in opposite directions.
On one side is concentration risk: having too much of your financial future riding on one company. On the other is the tax cost of doing something about it: selling a highly appreciated position can trigger a large capital gains bill. One side says “diversify, now.” The other says “don’t sell, the tax hurts too much.” Most of the value in handling a concentrated position well comes from navigating that tension honestly — rather than letting either fear make the decision by default.
This is educational rather than prescriptive — the goal is to lay out how the trade-offs actually work, and the strategies that exist for managing them, so you understand the real questions involved.
First, an Honest Look at the Risk
It’s worth being clear-eyed about why concentration is a problem, because the position that got someone here was, by definition, a winner — and winners are emotionally hard to sell.
The uncomfortable reality is that most individual stocks underperform the broad market over the long run; market returns are driven by a relatively small handful of big winners, while the typical single stock lags. And a stock that has dramatically outperformed recently carries no guarantee of continuing to do so — historically, the stocks that led over a five-year stretch have tended, on average, to trail the broad market over the decade that follows. The very thing that makes a concentrated position feel safe (“it’s done so well”) is often a reason for caution, not comfort.
That doesn’t mean a concentrated position is guaranteed to disappoint. It means you’re carrying a large, undiversified, company-specific risk — the risk that this one company stumbles — on top of normal market risk, for no extra expected return. That’s the risk diversification is meant to remove.
The Tax Truth That Changes the Conversation
Here’s the insight that reframes everything, and it’s the one most people get wrong: the tax on an embedded gain is worth less to defer than it feels.
When someone has a stock that’s grown from $200,000 to $1 million, they tend to see “$800,000 of gains I don’t want to trigger.” But that capital gains tax isn’t a cost you avoid by holding — it’s a liability you already owe, just one that hasn’t come due yet. Unless you plan to donate the position or hold it until death (more on both below), you will pay that tax whenever you eventually sell. Your real, after-tax net worth already reflects it. The position isn’t truly “worth” $1 million to you; it’s worth $1 million minus the tax that’s waiting.
So holding the stock doesn’t save the tax — it only defers it. And the actual economic value of that deferral is usually modest: it’s the growth on the tax dollars you got to keep invested a while longer, which at normal return rates is typically on the order of a percentage point or less per year. That’s a real benefit, but it’s small — and it is routinely dwarfed by the risk of riding a concentrated position through a bad stretch in that one company.
Consider the taxes carefully, but don’t let the tax tail wag the planning dog. If a position is genuinely too large and too risky for someone’s situation, “I don’t want to pay the tax” is rarely a good enough reason to keep carrying that risk.
The tax is a cost to manage thoughtfully — not a reason to avoid a decision that needs making. That said, “manage thoughtfully” is doing real work in that sentence. Here are the main ways to do it.
Strategy 1: Sell Deliberately, on a Budget
The most straightforward approach is also often the best: sell, pay the tax, reinvest in a diversified portfolio. The art is in the pacing.
Rather than liquidating all at once (and potentially launching a chunk of the gain into the top 20% capital gains bracket, or triggering the 3.8% Net Investment Income Tax), you set a capital gains budget — a target amount of gain to realize each year, sized to stay under the threshold that matters for you. In 2026, long-term capital gains are taxed at 0% up to $98,900 of taxable income for joint filers ($49,450 single), 15% up to $613,700 (joint), and 20% above that — with the 3.8% NIIT stacking on once modified AGI passes $250,000 (joint) or $200,000 (single), creating effective rates of 18.8% and 23.8%.
By spreading sales across several years, you keep more of each year’s gain in a lower bracket and avoid the cliffs — the 20% rate, the NIIT threshold, and the Medicare premium surcharges that can be triggered two years later by a big income spike. For someone with a moderate-sized position and some bracket headroom, a multi-year budget can unwind the whole thing at a very manageable cost. This is the same bracket-management logic that drives retirement withdrawal sequencing — and the two should be planned together, since both compete for the same low-bracket space each year.
A related technique helps with the behavioral side, which is often the real obstacle. Setting pre-committed sell targets — agreeing in advance to trim the position at certain price points, up or down — turns each sale from an agonizing real-time decision into the execution of a plan you already made. For someone who keeps saying “just let me see if it goes a little higher first,” a pre-set schedule is often what finally gets the diversification done.
Strategy 2: Net Unrealized Appreciation — When Company Stock Is Inside a 401(k)
If the concentrated position is employer stock held inside a 401(k) or ESOP — often the same stock accumulated through equity compensation over a long career — a special rule called Net Unrealized Appreciation (NUA) may apply, and it’s one of the most misunderstood strategies in this area, because it looks like a slam dunk and frequently isn’t.
Normally, everything that comes out of a traditional 401(k) is taxed as ordinary income. NUA lets you instead pull the employer stock out in-kind to a taxable account, pay ordinary income tax only on its original cost basis now, and have all the appreciation taxed later at lower long-term capital gains rates when you sell. (To qualify, the move has to follow strict rules: it can only happen after a triggering event — reaching 59½, leaving the employer, or death — the entire plan must be emptied in one calendar year, and the stock must move in-kind, not be sold and rebought.)
The catch is the part people skip: you pay ordinary income tax on the cost basis immediately, and you give up the account’s continued tax-deferred growth. That trade only pays off when the embedded gain is large relative to the cost basis — when the stock has appreciated enormously, so you’re converting a big gain to capital-gains rates while paying ordinary tax on only a small basis. When the basis is high relative to the gain, NUA can easily cost more than it saves, and a plain rollover to an IRA is the better move. NUA is a “run the numbers” strategy, not an automatic win — and the answer hinges almost entirely on that basis-to-gain ratio.
Strategy 3: Give It Away — Donate-and-Replace With a Donor-Advised Fund
For clients who are charitably inclined, appreciated stock is the best possible thing to give — and this is where we lean in heavily.
When you donate a long-held appreciated stock to charity directly (rather than selling it and donating cash), two things happen at once: you generally get a charitable deduction for the full market value, and the embedded capital gain simply disappears — neither you nor the charity pays it. A donor-advised fund (DAF) makes this practical: you contribute the appreciated shares to the DAF, take the deduction, and then recommend grants out to your chosen charities over time on whatever schedule you like.
It gets better with a “donate-and-replace” twist. If you were going to give to charity anyway, donate the concentrated shares instead of cash, then use the cash you would have donated to buy back into a diversified portfolio. You’ve funded your giving, eliminated a slice of embedded gain, and reset your cost basis higher on the replacement investment — quietly chipping away at the concentrated position at a tax cost of essentially zero. For a charitable client, donating appreciated stock through a DAF is, in our view, one of the most efficient moves available, and we’ll be covering the full mechanics of DAF and charitable bunching in a dedicated piece.
The honest caveat: this only “wins” for people who were genuinely going to give anyway. Donating purely to dodge a tax means giving away far more than the tax would ever have cost. The charitable intent has to be real first; the tax efficiency is the bonus.
Strategy 4: Build the Portfolio Around the Position (Direct Indexing)
Sometimes a client truly can’t or won’t sell — maybe they intend to hold the stock for heirs (who’d receive a stepped-up basis at death, erasing the gain entirely), or the emotional attachment is simply immovable for now. In those cases, you can still reduce the overall risk without selling a single share, by being deliberate about everything else.
The trap to avoid: if someone holds a large position in a big company and invests the rest of their money in a broad index fund, they’re unknowingly doubling down — because that big company is also a meaningful chunk of the index. The fix is a completion portfolio, often built through direct indexing (owning the individual stocks of an index rather than the fund). You construct the rest of the portfolio to deliberately exclude or underweight the concentrated stock and its sector, so the total picture comes back toward balance even though the position itself is untouched. It’s not a substitute for diversifying the actual position, but it stops the rest of the portfolio from quietly making the concentration worse — and it buys time to unwind the position thoughtfully through the other strategies. This is one of the main ways we “manage around” a position a client isn’t ready to sell.
Strategy 5: Exchange Funds — Useful, but Read the Fine Print
Exchange funds get marketed heavily to people with concentrated stock, and they sound almost too good: contribute your single appreciated stock into a pooled partnership alongside other investors with their own concentrated positions, and after a holding period, walk away with a diversified slice of the whole pool — without triggering capital gains on the way in. The deferral is real, and for the right person it can work.
But the trade-offs are substantial, and they’re easy to gloss over. The lockup is long — generally seven years, during which your money is effectively inaccessible. By law these funds must hold a meaningful slice (around 20%) in illiquid assets, typically leveraged real estate, which adds cost and risk that has nothing to do with your original stock. And because the pools fill up with whatever stocks people are trying to diversify out of — disproportionately the same handful of high-flying technology names — you can end up trading single-stock risk for single-sector risk, not the broad diversification you pictured.
Most importantly: an exchange fund defers the tax, it doesn’t erase it. Your low basis carries over. So the real question is the same one that runs through this whole topic — is it worth accepting seven years of illiquidity, leverage, and a portfolio you don’t control, just to postpone a tax you’ll eventually pay anyway? Sometimes yes. Often, simply selling on a budget and reinvesting in a portfolio actually suited to your life comes out ahead. It deserves a hard, numbers-first look rather than a reflexive “anything to avoid the tax.”
A Brief Word on Section 351 Exchanges
A newer strategy has emerged in the last couple of years: contributing a portfolio into a newly created ETF via a “Section 351 exchange,” deferring gains on the way in. It’s genuinely interesting, but two honest caveats keep it on the sidelines for now. First, it generally can’t diversify a truly concentrated position — the portfolio contributed has to already be reasonably diversified to qualify, so it’s more a tool for a “locked-up” diversified account than for a single big stock. Second, it’s very new, with a short track record. It’s worth watching, but it isn’t a first-line answer for concentration today.
How We Think About It
Put together, the throughline is simple to say and harder to live: a concentrated position is a risk to be managed, and the tax cost of managing it is real but usually smaller than it feels. We weigh the taxes carefully — sequencing sales on a budget, using NUA where the basis math genuinely favors it, leaning into donor-advised funds for charitable clients, building completion portfolios around positions clients aren’t ready to sell — but we don’t let the tax bill freeze a decision that the client’s overall risk picture says needs to be made. The goal isn’t to pay the least tax this year. It’s to get a client to a portfolio that actually fits their life, at a tax cost they understood and chose. That’s the difference between managing a position and being managed by it.
Common Questions
How much in one stock is “too much”? There’s no universal line, but the question to ask is: if this single company had a very bad few years, would it derail your plans? When one position is large enough that its fate materially changes your financial future, you’re carrying company-specific risk that a diversified portfolio is designed to remove — without being paid any extra expected return for taking it. The right amount depends on your overall picture, but most plans get uncomfortable well before a single stock becomes a third or more of investable assets.
Isn’t it smarter to just hold and avoid the capital gains tax? Usually less smart than it feels. The tax on an embedded gain isn’t avoided by holding — it’s deferred, and you’ll owe it whenever you sell (unless you donate the position or hold it until death). The economic value of that deferral is typically modest — on the order of a percentage point or less per year — and it’s easily outweighed by the risk of a concentrated position dropping sharply. Taxes are worth managing carefully, but “I don’t want to pay the tax” is rarely a strong enough reason to keep carrying a risk that’s too big for your situation.
Is NUA (Net Unrealized Appreciation) always a good deal for company stock in my 401(k)? No — and this surprises people. NUA lets you pay ordinary income tax only on the stock’s cost basis now and capital gains rates on the appreciation later, but you pay that basis tax immediately and give up future tax-deferred growth. It only pays off clearly when the appreciation is large relative to the cost basis. When the basis is high relative to the gain, a plain IRA rollover is often better. It’s a strategy to run the numbers on, not an automatic win.
What’s the best move if I’m charitable? Give appreciated stock rather than cash, ideally through a donor-advised fund. You generally get a deduction for the full market value and the embedded capital gain disappears entirely. If you pair it with a “donate-and-replace” approach — donating the concentrated shares and using your intended giving dollars to rebuild a diversified position — you can fund your charitable goals and chip away at the concentration at almost no tax cost. The catch: this only makes sense if you were genuinely going to give anyway.
Do exchange funds eliminate the tax on diversifying? No — they defer it, not eliminate it. Your low cost basis carries over, so the tax still comes due eventually. Exchange funds also come with real trade-offs: a roughly seven-year lockup, a required allocation to illiquid (often leveraged) real estate, and a tendency to leave you concentrated in a single sector rather than broadly diversified. They can make sense in the right situation, but they deserve a careful, numbers-first comparison against simply selling on a budget and reinvesting in a portfolio suited to your needs.
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