High-net-worth individuals frequently accumulate concentrated stock positions through company equity compensation, business sales, or long-term investment holdings. While such concentrations can generate substantial wealth, they also create significant portfolio risk and tax complexity. Tax-loss harvesting represents one component of a comprehensive strategy for managing concentrated positions.
The Tax-Loss Harvesting Mechanism
Tax-loss harvesting involves selling securities at a loss to offset capital gains realized elsewhere in a portfolio. The strategy converts unrealized losses into realized losses that can reduce current tax obligations. Importantly, the investor can immediately reinvest proceeds in similar (but not substantially identical) securities, maintaining market exposure while capturing tax benefits.
For investors with concentrated appreciated positions, tax-loss harvesting across other portfolio holdings can offset gains from diversification sales. This integration allows gradual reduction of concentration risk while managing the tax cost of doing so.
Wash Sale Considerations
The wash sale rule disallows loss deductions if substantially identical securities are purchased within 30 days before or after the sale. For common stocks, “substantially identical” typically means shares of the same company. Investors can maintain sector exposure during the wash sale window by purchasing securities of different companies in the same industry, or broad index funds that do not hold the specific security sold.
The rule applies across all accounts controlled by the taxpayer, including retirement accounts. An IRA purchase of a sold security can trigger wash sale treatment even though the loss was realized in a taxable account. This is a particularly costly outcome since the disallowed loss cannot be added to the IRA’s basis.
Strategies for Concentrated Positions
Systematic Diversification with Loss Harvesting
A coordinated approach pairs concentrated position sales with loss harvesting elsewhere in the portfolio. Consider an investor holding $5 million in employer stock with minimal cost basis, alongside a diversified portfolio containing positions with unrealized losses.
For example, by harvesting $200,000 in losses from underperforming positions, the investor can sell $200,000 of concentrated stock without net tax impact. Repeating this process annually, or more frequently during market volatility, allows gradual diversification while managing tax consequences.
Exchange Funds
Exchange funds pool concentrated positions from multiple investors into a diversified portfolio. Participants exchange their concentrated holdings for interests in the fund, achieving diversification without triggering immediate taxation. After meeting holding period requirements (typically seven years), investors receive a diversified basket of securities.
Exchange funds involve partnership structures, illiquidity during the holding period, and management fees. They work best for investors who can commit to the seven-year timeline and whose positions qualify for inclusion (publicly traded, sufficient market capitalization).
Charitable Remainder Trusts
Charitable remainder trusts (CRTs) provide another approach for concentrated positions. The investor transfers appreciated stock to an irrevocable trust, which can sell the position without immediate capital gains tax. The trust invests proceeds in a diversified portfolio and pays income to the donor (or other beneficiaries) for life or a term of years. At termination, remaining assets pass to designated charities.
CRTs offer immediate charitable deductions, income diversification, and capital gains deferral. However, the charitable remainder requirement means heirs will not receive trust assets, making CRTs most appropriate for investors with philanthropic objectives.
Qualified Opportunity Zone Investments
Investors can defer and potentially reduce capital gains by reinvesting proceeds into qualified opportunity zone funds within 180 days of realization. While the original basis step-up benefits expired after 2026, opportunity zone investments still offer indefinite deferral of the original gain and potential exclusion of appreciation on the opportunity zone investment if held for ten years.
Opportunity zone investments involve illiquidity and concentration in designated geographic areas. Due diligence on specific fund investments remains essential.
Year-End Considerations
The final weeks of the calendar year present heightened loss harvesting opportunities as investors assess year-to-date gains and losses. Market volatility during this period may create additional harvesting candidates.
Key year-end considerations include:
• Reviewing all accounts for loss harvesting candidates, including positions that may have declined only recently
• Calculating year-to-date gains from concentrated position sales to determine optimal harvesting targets
• Avoiding wash sales by planning replacement purchases carefully
• Considering the impact on state taxes, which may differ from federal treatment
The Role of Risk Management
While tax efficiency matters, risk management should drive concentrated position decisions. A single-stock position represents company-specific risk that diversification eliminates. Historical examples of concentrated positions losing substantial value, sometimes precipitously, underscore the importance of diversification regardless of tax considerations.
Effective planning integrates tax strategies with investment risk management, estate planning objectives, and liquidity needs. The optimal approach varies based on position size relative to total wealth, investor time horizon, charitable intentions, and risk tolerance.
Disclosure: Certuity, LLC, a Delaware limited liability company (“Certuity”), is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. Certuity® is a registered trademark of Certuity Holdings, LLC.This material is provided for educational purposes only and does not constitute investment, tax, or legal advice. The strategies discussed may not be suitable for all investors. Individual circumstances vary, and you should consult with qualified professionals before implementing any strategies. Past performance is not indicative of future results. Diversification and asset allocation do not ensure a profit or guarantee against loss.