Managing Concentrated Positions

A collection of strategies to help business owners keep more of their wealth.

Key numbers

Rule #1 applies here as much as anywhere. If gradual selling with loss harvesting gets you most of the way, that's probably the right answer. If you have charitable intent and a large enough position, the DAF approach is powerful and simple. The exchange fund and CRT are worth understanding, but they come with real constraints and costs — run the actual numbers before committing.

A concentrated position is when a single stock represents 10%, 20%, or more of your total portfolio. The position feels good — until it doesn't. And selling it to diversify triggers a capital gains bill on every dollar of appreciation.

At a combined rate of roughly 37%, selling $2M of appreciated stock with a $200K cost basis costs $666,000 in taxes. That's real. The question is whether there's a better path. There usually is, but the right one depends on your situation and how complex you're willing to get.

The strategies

1. Donate to a Donor-Advised Fund (DAF)

If you have charitable intent, this is often the cleanest option. You contribute the appreciated shares directly to the DAF. You avoid the capital gains tax entirely. You get a deduction at the full current fair market value, up to 30% of your AGI per year (with a 5-year carryforward). The DAF sells the shares, reinvests in a diversified portfolio, and you grant the proceeds to charities of your choice over time.

2. Exchange fund

An exchange fund (or swap fund) lets you contribute your concentrated shares to a partnership alongside other investors who have their own concentrated positions. In return, you receive an interest in a diversified portfolio — without triggering a taxable sale. The catch: you must hold the fund for at least seven years, the minimum investment is typically $1M+, and you're locking into whatever the fund holds. It's illiquid and expensive. But it solves the concentration and diversification problem simultaneously.

3. Borrow against the position

A pledged asset line lets you borrow against the value of your concentrated stock without selling it. You access liquidity. No taxable event. The risk is the loan comes due if the stock drops far enough — margin calls are real and can force a sale at exactly the wrong time. This strategy buys time, it doesn't eliminate the eventual tax.

4. Gradual selling with tax-loss harvesting offsets

Sometimes the simplest approach is to sell a portion each year, staying below thresholds that would push gains into higher brackets, and use tax-loss harvesting elsewhere in the portfolio to offset some of the gain. Slow and steady, but it works without complexity.

5. Charitable Remainder Trust (CRT)

A CRT lets you contribute appreciated shares to an irrevocable trust. The trust sells the shares without triggering capital gains. You receive an income stream from the trust for a set period or for life, and when the trust ends, the remainder goes to charity. You get a partial charitable deduction upfront. This is more complex to set up, requires a long-term commitment, and works best when charitable giving is part of your plan.