Concentrated Stock Position: How to Diversify

Concentrated Stock Position: How to Diversify Without a Huge Tax Bill

A concentrated stock position occurs when one company, often your own employer, quietly becomes the single biggest risk in your financial life. It usually does not happen on purpose. Years of RSUs vesting, an ESPP you kept adding to, stock options you never got around to exercising and selling, and one day you look at your accounts and realize forty or fifty percent of your net worth rides on one company’s stock price.

That is not a criticism. It is just how equity compensation works, and it is one of the most common situations we see with clients in their 50s and 60s who are getting ready to retire. The problem is not that you own the stock. The problem is what happens if that one company has a bad decade right when you need the money. One of the main tools we use to work through this without an outsized tax bill is direct indexing, which lets you rebuild a diversified portfolio while generating tax losses as you sell down the concentrated position.

Why This Happens So Often

A few common paths lead here:

Long tenure at one company. RSUs and options vest year after year, and if you never sell, the position compounds right alongside the stock price.

Inherited stock. A family member’s long-held position sometimes ends up in your hands all at once, often with a large embedded gain attached.

A company sale or IPO. Founders and early employees can end up with the bulk of their net worth tied to a single stock the day it becomes publicly traded.

Whatever the path, the outcome is the same. Your financial security is tied to one company’s performance, which is a very different risk profile from that of a diversified portfolio.

The Risk You Are Actually Taking

A diversified portfolio spreads company-specific risk across hundreds or thousands of businesses. A concentrated position removes that protection entirely. If the company has a strong run, you benefit more than a diversified investor would. If it has a bad year, or a bad decade, there is nothing else in the position to absorb the hit.

This is not a hypothetical. Plenty of well-known, well-respected companies have gone through periods of severe decline or even collapse, and the employees who had the bulk of their savings tied up in company stock felt it most, often just as they were counting on that money for retirement.

Why Selling a Concentrated Stock Position All at Once Gets Expensive

Here is where the tax side comes in, and where a lot of people get stuck. If you have held the stock for years, you likely have a large embedded capital gain. Selling it all in one year to fix the concentration problem can trigger a tax bill big enough that it feels like it defeats the purpose.

At the federal level, a long-held position usually qualifies for the long-term capital gains rate, which tops out around 20%, plus a possible 3.8% net investment income tax for high earners. If you are a New York resident, the state adds its own layer on top, and it is worth noting that New York does not offer any discount based on how long you held the stock. Every dollar of the gain is taxed at your regular New York income tax rate, just like your paycheck. We go into this in more detail in our piece on how New York taxes capital gains, but the short version is that a New York resident selling a large position all at once can easily see 30% or more of the gain go to taxes between the federal and state bill.

That tax exposure is exactly why most people do not just sell everything on day one. It takes a plan.

How to Actually Diversify Without the Full Tax Hit

There is not one right answer here. The right approach depends on how large the position is, what your income looks like, whether you are still working, and how much risk you are comfortable carrying while you diversify. A few tools we look at regularly:

Selling on a schedule. Instead of selling all at once, spreading the sale across several tax years keeps more of the gain out of your highest tax bracket each year. If you are still employed by the company, a 10b5-1 plan can also automate sales on a set schedule, which removes some of the emotional difficulty of deciding when to sell and helps keep you clear of insider trading concerns.

Direct indexing. As you diversify out of the concentrated stock, the proceeds have to go somewhere, and this is where direct indexing tends to do the most work. Below, we cover in detail exactly how it applies to a concentrated position.

Exchange funds. For very large positions, contributing shares to an exchange fund alongside other investors with their own concentrated positions can diversify your exposure without triggering an immediate sale. These come with trade-offs, including lockup periods and minimum eligibility requirements, so they are not the right fit for everyone.

Charitable giving. If giving is part of your plan anyway, donating appreciated shares directly to a charity or a donor-advised fund avoids the capital gain entirely while still providing a deduction. This works well as one piece of a larger diversification plan, not usually as the whole solution.

Hedging strategies. Options-based strategies like collars can limit downside risk on a position you are not ready to sell yet, buying time while you work through the tax picture. These add complexity and cost, so they tend to make more sense for larger positions.

Most plans end up combining two or three of these rather than relying on just one.

A Simple Example

Say you are 58, still working, and you have $600,000 of company stock sitting in a position that started as RSUs over the past fifteen years. Your cost basis is low, so most of that $600,000 is gain. Selling it all this year could push a meaningful chunk of that gain into your highest tax bracket, both federally and in New York.

Instead, a plan built around selling roughly a fifth of the position each year for the next five years, reinvesting the proceeds into a direct indexed portfolio that generates its own tax losses along the way, spreads the tax impact out, reduces the risk of sitting in one stock more each year, and gets you fully diversified well before you actually need to draw on the money in retirement.

How Direct Indexing Helps With a Concentrated Stock Position

Diversifying out of a concentrated position always raises the same question. Once you sell, where does the money go, and how do you avoid recreating the same tax problem you are trying to solve? Direct indexing is built to answer exactly that question, which is why it comes up in nearly every conversation we have about concentrated stocks.

How It Would Actually Work Here

Take the example above: someone diversifying $600,000 out of company stock over five years. As each year’s portion of the position is sold, the proceeds are allocated to a direct indexed account rather than to a single index fund. That account directly owns the individual stocks that make up a broad market index in your own name, rather than owning shares of a single bundled fund.

Two things happen as a result of that structure. First, the account can be set up to exclude your employer’s stock entirely from day one, so you are not diversifying away from concentration only to end up holding the same stock again in an index fund. Second, throughout the year, as individual names in the index decline in value, the account sells those positions at a loss and replaces them with similar stocks to maintain the portfolio’s overall exposure. Those losses accumulate and get used to offset the gain from that year’s tranche of company stock sales, reducing the net tax cost of each year’s diversification step.

Over the full five-year timeline, this means the diversification itself is generating some of the tax relief needed to pay for it, rather than the entire tax bill landing with no offset at all.

The Benefits, Specifically

It offsets the exact gain you are creating. As you sell shares of the concentrated position each year, the direct indexed account runs in parallel to generate losses that can offset those gains, thereby lowering the net tax cost of the diversification plan itself.

It keeps you out of the stock you are leaving. Unlike a standard index fund, which may include your employer’s stock as part of the broader index, direct indexing lets you explicitly exclude it, so you are not undoing your own diversification.

It gives you a home for the proceeds that keeps working. Rather than parking sale proceeds in a simple fund and waiting, the account actively harvests losses from day one, which compounds the usefulness of the diversification plan the longer it runs.

It fits naturally with a multi-year sell-down. Because both stock sales and loss harvesting occur gradually over time, the two processes reinforce each other rather than being two separate, disconnected decisions.

The Tradeoffs

This is not a strategy without cost or complexity, and it is worth being direct about where it falls short.

It requires a meaningful account size. Most direct indexing platforms require between $250,000 and $500,000 to build a properly diversified basket of individual stocks, so smaller tranches of a diversification plan may not be a good fit on their own.

It adds more moving parts at tax time. Instead of a simple 1099 from an index fund, you will have many more individual transactions each year. This needs to be coordinated closely with your CPA, particularly in years when you are also recognizing gains from the concentrated stock sale.

It adds more moving parts at tax time. Instead of a simple 1099 from an index fund, you will have many more individual transactions each year. This needs to be coordinated closely with your CPA, particularly in years when you are also recognizing gains from the concentrated stock sale.

Costs are higher than those of a plain index fund. Managing individual positions across hundreds of stocks costs more than a single ETF, so the strategy needs to be paired with a large enough tax benefit to justify it.

Wash sale rules apply. If you are also harvesting losses elsewhere in your portfolio or hold similar positions in other accounts, the wash sale rule can limit how you can use some of these losses. This needs to be coordinated across your entire portfolio, not looked at on an account-by-account basis.

It gets harder to unwind once the easy losses are gone. Loss harvesting works best in the early years of an account, when there is a wide spread between what you paid for each stock and its current value. Over time, as the market rises and the easy losses are used up, what remains in the account increasingly becomes embedded gains. At that point, the account has effectively become its own concentrated, low-basis portfolio, just spread across many individual stocks rather than a single one. Selling out of it entirely to simplify or raise cash can trigger a large tax bill of its own, the same problem the strategy was originally built to solve. This is usually managed by slowing the pace of new harvesting, layering in fresh cash to keep some positions at a higher basis, or eventually using a Section 351 exchange to convert the account into an ETF without triggering a gain. But it is not something to enter into assuming the account will always be easy to simplify or exit later. It takes ongoing management, not a set-it-and-forget-it approach.

Frequently Asked Questions

What is considered a concentrated stock position?

Most planners start paying close attention once a single stock represents somewhere between 10% and 20% of your total investable net worth. Above that range, the position starts to function more like a bet on one company than a diversified investment.

How do I diversify company stock without paying a huge tax bill?

The most common approach is to spread the sale across multiple years rather than selling all at once, which limits how much of the gain is taxed in any single year. Direct indexing, exchange funds, charitable giving, and hedging strategies can each play a role depending on the size of the position and your goals.

Should I sell my RSUs as soon as they vest?

For most people, yes, at least the majority of them. RSUs are taxed as ordinary income at vesting, regardless of whether you sell them, so holding them afterward effectively means investing after-tax dollars in your employer’s stock. Many advisors recommend selling most RSUs shortly after vesting to avoid rebuilding a concentrated position.

Does New York tax gains on company stock differently than other states?

New York taxes all capital gains, including gains on company stock, as ordinary income with no reduced rate for long-term holdings. This makes the tax cost of selling a large position in one year higher for New York residents than for residents of states that follow the federal long-term capital gains discount.

What is a 10b5-1 plan?

A 10b5-1 plan is a prearranged, written plan that sets out in advance when and how you will sell company stock. Executives commonly use it, as do long-tenured employees with a concentrated stock position to sell shares on a predictable schedule while avoiding insider trading rules.

How does direct indexing help with a concentrated stock position?

Direct indexing lets you rebuild a diversified portfolio one stock at a time instead of through a single index fund. As you sell down the concentrated position over time, the portfolio you are building in its place can exclude that stock entirely and generate ongoing tax losses that offset the gains you are realizing along the way. It is one of the few strategies designed specifically to make a gradual diversification plan more tax efficient rather than just less risky.