Highly Appreciated Concentrated Stock Positions

Carrying too many of your financial eggs in one basket introduces an element of risk to your portfolio. If one stock or sector of the economy falters, you may not be able to reach your financial goals. Some investors ignore this risk and maintain a concentrated position for various reasons. Certain investors choose to retain a particular stock because it was inherited from a loved one and carries great sentimental value. Other investors choose to accumulate a particular stock due to supreme confidence in the underlying corporation. Most investors who maintain a concentrated position, however, do so to avoid the tax consequences of selling the position. If an aversion to taxes has caused you to retain a highly appreciated concentrated position, consider the following strategies to diversify your portfolio in a tax-efficient manner.

Unwind the Position Over Multiple Tax Years Rather than selling the entire position within a single tax year, consider spreading the capital gains over a number of tax years. This alternative could potentially keep you from moving into a higher capital gains tax bracket or help you avoid the 3.8% net investment income tax (NIIT). For the current capital gains tax brackets and other pertinent tax information, contact your financial advisor or tax professional.

Example: Doug and Carol recently retired. In 2020, their taxable income (after applying deductions) will be $35,000. They have the opportunity to realize an additional $45,000 of long-term capital gains without moving out of the 0% capital gains bracket. Doug and Carol decide to sell off a portion of their concentrated position to harvest the additional capital gains.

Use Shares of Your Concentrated Position to Fund Charitable Goals Donating appreciated assets (rather than cash) can be a tax-efficient way of funding your charitable goals. When you contribute an appreciated asset to charity, you avoid the underlying capital gain forever and are entitled to a charitable deduction equal to the fair market value of the asset on the day it is contributed up to the maximum amount allowed. In 2020, the maximum charitable deduction allowed for the donation of appreciated assets is equal to 30% of a taxpayer’s adjusted gross income (AGI). You should remember charitable deductions are only useful to the extent they allow your itemized deductions to exceed the applicable standard deduction.

Example: Over her career, Hope accumulated a significant amount of her former employer’s stock. Her basis in the shares is $100,000 but their current value is just north of $1,000,000. Hope elects to fund her $20,000 annual charitable giving goal by transferring shares of her concentrated position directly to the charitable organization of her choice.

While contributions directly to a charity are certainly an option, there are additional charitable giving strategies that work well with highly appreciated stock positions. These strategies include donor-advised funds and charitable remainder trusts. For more information on various charitable giving strategies, be sure to speak with your financial advisor and a tax professional.

Neither Stifel nor its associates provide legal or tax advice. You should consult your tax advisor regarding your particular situation.  

Article provided by Bryan A. Ruder, CFP?, MSPFP, AAMS?, AIF?, AWMA?, CRPC?, MPAS? , Associate Vice President/Investments, Stifel, Nicolaus & Company, Incorporated, Member SIPC and New York Stock Exchange, who can be contacted in the Evansville office at (812) 475-9353 or [email protected]