The Hidden Tax Risks of Concentrated Stock Positions
For many successful clients, concentrated stock positions are a sign that something went very right.
Maybe they accumulated company stock throughout a long career. Perhaps they received equity compensation from a rapidly growing employer. They may be a founder whose wealth is still heavily tied to the business they helped build. Or they simply bought the right stock at the right time and watched it appreciate significantly.
Whatever the reason, a concentrated position can create substantial wealth.
It can also create a planning challenge.
For financial advisors, diversification may seem like the obvious conversation. But when a highly appreciated position is involved, the question isn't simply whether a client should sell.
It's how, when, and under what tax circumstances they should reduce the concentration.
The Tax Bill Can Become a Barrier to Diversification
A client may understand perfectly well that having too much of their net worth tied to one company creates risk.
They may still hesitate to sell.
One reason is simple: taxes.
When an appreciated investment held in a taxable account is sold, the resulting capital gain may create federal, and potentially state, tax consequences. For sufficiently high-income taxpayers, the Net Investment Income Tax can also become part of the equation.
That can create an uncomfortable tradeoff.
The client knows diversification may reduce portfolio risk, but selling the asset that created their wealth can trigger a significant tax liability.
The result? Sometimes they do nothing.
Bear in mind that doing nothing is still a decision.
Cost Basis Matters More Than the Current Share Price
When reviewing a concentrated position, the market value only tells part of the story.
Advisors also need to understand how the client acquired the shares and what their cost basis looks like.
Consider two clients who each own $1 million of the same stock. Let's say that one invested $800,000, while the other invested $100,000.
Their portfolios may look identical on a statement, but the tax consequences of selling them could be dramatically different.
Things can become even more complicated when shares were accumulated through multiple purchases, inherited assets, employee stock purchase plans, restricted stock, or other forms of equity compensation.
Before developing an exit strategy, advisors need a clear picture of the embedded gain they're actually working with.
Selling Doesn't Have to Be an All-or-Nothing Decision
A concentrated position doesn't necessarily need to disappear overnight.
Depending on the client's circumstances, gradually reducing exposure over multiple tax years may allow the advisor and tax professional to manage the transition more intentionally.
That could mean coordinating sales with years in which the client's taxable income is lower, realizing gains alongside available capital losses, or evaluating how a planned sale interacts with other significant financial events.
This is where tax projections become particularly useful.
Instead of asking: "How much tax will I owe if I sell?"
the planning conversation becomes: "How much can we sell while staying within the broader tax strategy we've established?"
Charitable Goals Can Change the Conversation
For charitably inclined clients, appreciated securities may also create planning opportunities.
Rather than selling appreciated stock, recognizing the gain, and then donating cash, certain clients may be able to donate appreciated securities directly to a qualified charitable organization or contribute them to a donor-advised fund.
That can potentially help the client advance a charitable goal while addressing part of the concentration problem.
The key word, however, is "planning."
Charitable strategies shouldn't be introduced simply because a client has appreciated stock. They make the most sense when generosity was already part of the client's financial priorities.
Equity Compensation Adds Another Layer
Concentrated positions are especially common among executives and employees who receive significant equity compensation.
In those cases, the tax considerations can extend well beyond ordinary capital gains.
Stock options, restricted stock units, employee stock purchase plans, and other compensation arrangements can each carry their own tax rules and timing considerations.
An advisor may be helping the client answer several questions simultaneously:
Should existing shares be sold?
Should options be exercised?
What happens to taxable income this year?
How much additional exposure will upcoming vesting create?
What does the client need for cash flow?
Looking at each decision independently can cause both clients and advisors to completely skim over the bigger picture, completely inadvertently, of course.
Don't Forget the Rest of the Client's Tax Year
A concentrated stock sale doesn't happen in isolation.
A client might also be selling a business, exercising stock options, taking retirement distributions, making a Roth conversion, realizing losses elsewhere in the portfolio, or experiencing a significant change in income.
Each can affect the tax consequences of another.
That's why the best time to involve the client's tax professional isn't after the trade has already occurred.
It's while the strategy is still being built.
An advisor can identify the investment risk and potential paths forward. A tax professional can model how those choices interact with the client's broader tax situation.
Together, they can help the client make a decision based on more than fear of the tax bill.
A Concentrated Position Is Often More Than an Investment
There's another factor advisors shouldn't underestimate: emotion.
Company stock may represent decades of a client's career. Founder shares may feel inseparable from the business they created. A long-held investment may be associated with the decision that helped create the family's wealth in the first place.
Telling someone to "diversify" can therefore sound much simpler than it feels to the person sitting across the table.
The strongest planning conversations acknowledge both realities. Yes, concentration creates risk. Yes, selling can create taxes. Fortunately, there may be a thoughtful way to address both.
For advisors serving high-net-worth clients, that's where coordinated investment and tax planning can become especially valuable.
At Bookkeeper.com, we help financial advisors bring tax expertise into these conversations so clients can evaluate major financial decisions with a clearer understanding of the tax consequences before they act.
When a single investment represents a significant portion of a client's wealth, the question is more about how to make the best strategic decision, not just whether selling is the right move.
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