Concentrated, low-basis stock positions often represent substantial portfolio risk but also planning challenges given potential tax liability associated with sales. Importantly, an array of strategies is available to seek to address these issues, with the aim of facilitating risk reduction and liquidity generation on a tax-efficient basis. In this white paper, we explore the merits and mechanics of these potential solutions.
Highlights
- Various approaches are available to address the portfolio and tax risks associated with concentrated single-stock positions.
- Risk management solutions such as single-stock options and prepaid variable forwards can immediately reduce near-term risk, often by trading some potential upside for downside mitigation.
- Tax deferral solutions such as 351 exchanges and tax-managed portfolios (including long-short strategies) focus on deferring the payment of taxes until a later date, allowing more dollars to remain invested and compound with market growth.
- Tax elimination solutions, such as index option overlays, can create an additive cash flow used to pay off realized tax expenses and to maximize investment flexibility, optimizing after-tax outcomes over time.
- In practice, we believe that a spectrum of solutions and timelines may be needed to achieve positive outcomes in relation to single-stock positions.
