Carefully, and almost never all at once. The goal is to reduce the risk of having too much of your wealth in one stock without handing a huge chunk of it to the IRS in a single year.
That tension is the whole problem. You know you are too concentrated. You also know that selling triggers taxes, so you freeze. After more than twenty years doing this for tech and biotech professionals around Greater Boston, I can tell you the people who get hurt are almost always the ones who did nothing, not the ones who sold a little too early.
What is the real risk of a concentrated stock position?
Start with the danger, because it is bigger than most people feel it is.
When one stock makes up a large share of your net worth, you are exposed to a single company in a way that has nothing to do with how good that company is. Great companies drop 40% on one bad earnings call. Great companies get investigated, disrupted, or simply fall out of favor. If most of your wealth and your paycheck both come from the same employer, one bad event hits you twice.
There is a quieter risk too, and it is behavioral. People fall in love with the stock that made them money. They anchor to the highest price they ever saw it hit and refuse to sell below it. They tell themselves it is different. I have watched smart, disciplined people apply careful logic to every other part of their financial life and then go completely irrational about the one position that happens to be their company. Recognizing that pull is half the battle.
And then there is tax paralysis, which is the most common trap of all. People refuse to sell purely because they do not want to pay capital gains tax. That is letting the tax tail wag the dog. Paying tax on a gain means you made money. Losing 40% of an un-diversified position because you would not pay 20% to protect it is the actual worst outcome.
How do you diversify without a huge tax bill?
Here is the good news. You have far more tools than "sell it all and pay the tax." The right plan usually blends several of these.
- Staged, systematic selling. Instead of one giant sale, you sell in planned tranches across multiple tax years. This keeps you out of the top capital gains bracket and away from the extra 3.8% net investment income tax where possible. If you are an insider, this runs through a 10b5-1 plan so you can sell inside trading windows without headaches.
- Direct indexing to offset gains. As you reinvest the proceeds into a diversified portfolio, a direct-indexing approach harvests small losses along the way that you can use to offset some of the gains from your concentrated position. It turns your new portfolio into a tax-management engine.
- Exchange funds. You contribute your concentrated shares into a fund alongside other investors with their own concentrated positions, and you receive a diversified basket back without triggering a sale. The gain is deferred, not erased, and there is typically a seven-year lockup, but for a large low-basis position it is one of the most powerful tools available.
- Give appreciated shares, not cash. If you are charitable anyway, donating your most-appreciated shares to a donor-advised fund lets you skip the capital gains entirely and take an income tax deduction at fair market value. You give the same amount you were going to give, and you do it with the most tax-efficient dollars you own.
- Gifting and trusts for the largest positions. For very large holdings, gifting shares to family members in lower tax brackets, or using a charitable remainder trust, can spread or defer the tax while meeting other goals.
The point is not to use all of these. It is to combine the two or three that fit your situation into a plan that moves you out of danger on a schedule you can live with.
A real example
I have sat across from dozens of people in this exact spot, and the numbers below are a close composite of how it usually goes.
Marcus is 43, a software engineer at a public tech company. Over eight years his RSUs vested and he simply held everything. It felt good to watch it grow, so he never touched it. By the time he came in, that single position was worth $1.4M and made up about 70% of his $2M in liquid net worth. His cost basis was low, around $300K, so he was sitting on roughly $1.1M in unrealized gains. If you have let vested shares pile up because selling felt like a chore or a tax event, this is you.
The trap was obvious once we said it out loud: his job and 70% of his wealth were riding on the same company. And the reason he had not acted was pure tax paralysis. He assumed diversifying meant a catastrophic tax bill, so he did nothing.
Here is what dumping it all in one year would actually have cost. Realizing $1.1M in long-term gains at once stacks into the top bracket: 20% federal plus the 3.8% net investment income tax, plus Massachusetts at 5%. That is roughly $315K in tax, all in a single year, most of it at the highest rates. No wonder he froze.
So we did not do that. We built a blend:
He contributed $400K of the position into an exchange fund. That deferred the gain entirely and gave him instant diversification on a big slice. He donated $100K of his most-appreciated shares to a donor-advised fund, which he funded his regular charitable giving from over the next few years. That skipped the capital gains on those shares and gave him a deduction at his 35% bracket. The remaining position, about $900K, we sold in planned tranches of roughly $300K a year over three years, spreading the gains across tax years and harvesting offsetting losses through direct indexing on the reinvested proceeds.
The named outcome: over three years, his concentration went from 70% of his net worth down to under 15%. A large portion of the gain was deferred rather than paid, the donated shares avoided capital gains altogether, and the sales he did make were spread out to avoid a single-year tax spike. He kept far more of his money working, and he stopped losing sleep over one earnings report.
Frequently Asked Questions
What counts as a concentrated stock position?
There is no single rule, but once a single stock makes up more than about 10% of your net worth, it is worth paying attention. Past 20% or 30%, the risk to your overall financial picture is significant enough that a plan to reduce it usually makes sense.
Can I diversify without paying capital gains tax?
You can defer or reduce the tax meaningfully, though rarely avoid it entirely. Exchange funds defer the gain, donating appreciated shares avoids the gain on what you give, and staged selling spreads the tax across years. The right blend often cuts the effective cost far below a single all-at-once sale.
What is an exchange fund?
It is a fund you contribute your concentrated shares into, alongside other investors with their own concentrated positions, receiving a diversified basket back without triggering a sale. The gain is deferred rather than erased, and there is typically a seven-year lockup. For a large low-basis position, it is one of the most powerful diversification tools available.
Should I just sell it all at once and pay the tax?
Rarely. Realizing all your gains in a single year usually stacks them into the highest brackets and triggers the net investment income tax. Spreading sales across multiple years, combined with other tools, almost always keeps more of your money working.
How long does it take to diversify a large position?
Often two to four years for a sizable low-basis holding, because spreading the sales across tax years is what keeps the tax bill manageable. The goal is steady progress from dangerous to diversified, not an overnight fix.
The real takeaway
Diversifying a concentrated position is not about whether to reduce it. If one stock is most of your net worth, the answer to that is yes. It is about *how*, and the "how" is where the money is saved.
The people who do this well do not panic-sell and they do not freeze. They build a multi-year plan, use the tax tools available to them, and move steadily from dangerous to diversified. The tax bill is real, but it is manageable, and it is a far better problem than watching an un-diversified fortune cut in half by a company you do not control.
A concentrated position is usually part of a bigger equity-compensation picture. If yours came from RSUs, options, or a company that went public or got acquired, it is worth looking at the whole thing together. See our equity compensation planning approach for how these pieces connect.