
Strategies for Managing a Large Single Stock Position
Managing a large block of stock requires a thoughtful and strategic approach. Concentrating too much wealth in a single company carries significant risk, as seen with once-dominant stocks like GE, Intel, and Boeing. Whether the goal is gradual diversification, accessing cash, or addressing tax implications, the following five strategies are the most effective I have seen for managing substantial single-stock positions:
1. Customized Index with Tax-Loss Harvesting
A customized index allows investors to diversify their stock holdings while optimizing tax efficiency and personalization.
Key Advantages:
a. Tax-Loss Harvesting
- By holding individual securities instead of a fund, investors can harvest tax losses even during an up market.
- These losses can offset gains from stock sales, creating a tax-efficient path for further diversification.
- Research shows a customized index can generate tax losses equaling up to 20% of its value in the first year
b. Personalization
- Investors can exclude specific stocks or sectors, ensuring better diversification.
- For example, if diversifying from Apple, Microsoft, or Amazon stock, a customized index avoids reinvestment in these companies, which may compose up to 10% of a standard fund.
Customized indexes combine tax efficiency and flexibility, making them an excellent option for investors seeking tailored diversification.
2. Securities-Backed Loan (SBL)
An SBL allows stockholders to access liquidity without selling their shares or incurring capital gains taxes.
How It Works:
- A financial institution provides a loan using the stock as collateral.
- The investor receives cash upfront and pays interest on the loan balance while retaining ownership of the stock.
Notable Example: Steve Ballmer used an SBL to fund his purchase of the Los Angeles Clippers. By leveraging his Microsoft stock as collateral, he avoided a significant tax bill and preserved the stock's future growth potential, achieving substantial gains in both his stock and his new investment.
SBLs work on any scale, providing flexibility for stockholders needing liquidity while avoiding immediate tax consequences.
3. Donor-Advised Fund (DAF)
For philanthropically inclined investors, DAFs offer a tax-efficient way to manage concentrated stock positions.
How It Works:
- Gift: The investor donates appreciated stock to a DAF and receives a tax deduction.
- Reallocation: The DAF reallocates funds to align with the donor's investment goals.
- Charitable Giving: The investor directs donations to charities over time.
Pairing a DAF contribution with the sale of appreciated stock in the same tax year can offset taxable gains, allowing for effective diversification and charitable impact on the donor's timeline.
4. Tax-Bracket Conscious Selling
When liquidating appreciated stock, planning sales to stay within favorable tax brackets can reduce the overall tax burden.
Taxes to Monitor:
- Federal Capital Gains Tax:
15% tax rate increases to 20% for single filers earning over $518,900 and joint filers earning over $583,751 in 2025.
- WA State Capital Gains Tax:
A 7% tax applies to gains exceeding $270,000 starting in 2024.
- Net Investment Income Tax (NIIT):
An additional 3.8% tax applies for incomes above $200,000 (single) or $250,000 (joint).
By estimating the gains that can be realized before reaching higher tax brackets, investors can optimize sales and minimize taxes.
5. Exchange Funds and Opportunity Zone Funds
These funds provide avenues to diversify large stock positions while deferring taxes.
Key Differences:
Exchange Funds:
- Investors contribute stock to a pooled fund, creating a diversified portfolio.
- After a set period, the fund redistributes a mix of assets to the investors.
Opportunity Zone Funds:
- Invest in underdeveloped areas, often in real estate or small businesses.
- Hold for 10+ years to qualify for tax-free growth on the fund's appreciation.
Both options allow investors to defer taxes on the sale of their stock while diversifying into new investments.
Final Thoughts
Managing a large block of stock requires balancing diversification, liquidity, and tax efficiency. The strategies outlined here—customized indexes, securities-backed loans, donor-advised funds, tax-conscious selling, and specialized funds—offer tailored solutions to meet a range of investor needs. By selecting the approach that aligns with their goals, investors can mitigate risks and maximize financial outcomes.
A diversified portfolio does not assure a profit or protect against loss in a declining market. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.