A successful stock investment or years of company equity compensation can create substantial wealth. It can also leave your financial future dependent on a single company.
When shares carry large unrealized gains, selling can feel expensive, but holding has a cost too. Technology stocks can lose significant value quickly, and a recovery to prior highs is never guaranteed.
Several approaches can help manage this tradeoff. Below are four options, from simplest to more complex, followed by two specialized structures:
1. Sell the stock and pay the taxes
Selling some or all of the position and reinvesting the proceeds is the most straightforward approach. It immediately reduces company-specific risk on the shares sold and creates flexibility to diversify across stocks, bonds, and other assets.
The tradeoff: A potentially substantial capital gains tax bill. Selling gradually can spread realized gains across tax years, but leaves the remaining shares exposed to the company’s fortunes.
What you’re left with: After-tax proceeds that can support a more diversified portfolio.
2. Direct indexing: Diversify gradually while harvesting losses
Direct indexing involves owning individual stocks that seek to track an index. A manager can sell specific holdings at a loss and use those realized losses to help offset gains from selling your concentrated stock.
The tradeoff: Losses are not guaranteed or unlimited. The transition may take years, require additional investment capital, and leave you holding a substantial concentrated position while waiting for opportunities. That stock could decline before the transition is complete.
What you’re left with: A diversified stock portfolio alongside any remaining concentrated shares. There would likely be unrealized capital gains on the new diversified stock portfolio.
3. Tax-aware long/short: More flexibility, more moving parts
These strategies combine stock ownership with short positions, which generally benefit when the shorted stocks decline. They seek investment returns while harvesting losses that may help offset gains as you reduce a concentrated position.
The tradeoff: Greater complexity, manager and execution risk, and potentially leverage, borrowing costs, and higher fees. Neither investment results nor tax benefits are guaranteed.
What you’re left with: A potentially more diversified portfolio, but often with substantial embedded gains. The strategy generally defers taxes; fully unwinding it can trigger a significant tax bill. Understanding the exit plan matters as much as understanding the initial benefit.
4. Charitable remainder unitrust: Diversification with a charitable purpose
A charitable remainder unitrust, or CRUT, is an irrevocable trust funded with appreciated assets. It can sell the contributed shares without immediate capital gains tax at the trust level, reinvest the proceeds, and pay a percentage of its annually valued assets to you or other designated beneficiaries. The remaining assets eventually pass to charity.
The tradeoff: You permanently commit the remainder to charity, give up unrestricted access to the contributed assets, and take on legal and administrative costs. Payments to beneficiaries are generally taxable under rules that pass through the trust’s income and gains.
What you’re left with: A variable payment stream, a potential partial charitable deduction, and a meaningful charitable legacy. A CRUT can be powerful when charitable giving is already part of your goals.
Two specialized options
Section 721 exchange funds: Eligible investors contribute appreciated stock to a partnership in exchange for an interest in a pooled, diversified portfolio, potentially deferring recognition of the gain. These funds commonly involve a seven-year holding period, limited liquidity, and investment restrictions. The original tax liability does not simply disappear.
Section 351 ETF contributions: Certain qualifying portfolios can be contributed to an ETF in exchange for ETF shares without immediate gain recognition. Strict requirements mean this generally is not a direct solution for exchanging one highly concentrated stock. Recent IRS guidance also challenges certain planned ETF conversion transactions, making specialist tax review essential.
Prevent concentration from rebuilding
At Azul, we generally recommend an annual plan to sell vested RSU shares and redirect proceeds across different asset classes, subject to trading restrictions and each client’s circumstances. Selling near vesting may help prevent a large embedded gain from developing. Ordinary income is generally recognized when RSUs vest and settle, while subsequent price changes create capital gains or losses.
Your salary, future equity compensation, and investments may already depend on the same company. Regular diversification helps preserve the wealth you have earned and reduces the chance that one company’s setback disrupts your broader financial goals.
The goal is to balance risk, taxes, liquidity, and your family’s needs.
For educational purposes. Strategy suitability and tax consequences depend on individual circumstances. Diversification does not guarantee a profit or prevent losses.