How to Diversify a Concentrated Stock Position Without Overpaying in Tax

Equity comp has a way of turning into one big position. RSUs vest, the stock goes up, and a few years later a large part of your net worth is in a single company, often the one that also pays your salary.

Here’s how to think about the risk, the tax cost of reducing it, and the main ways to do it.

What counts as concentrated

A common rule of thumb is that any single stock above 10% of your net worth is a concentrated position. Many tech professionals are far above that, sometimes at 50% or more.

The risk isn’t just that the stock could fall. It’s that your job, your bonus, your unvested equity and your savings all depend on the same company. A bad year can hit all of them at once.

Why the risk is bigger than it looks

• Single stocks swing more than the market. Even great companies regularly fall 30% or more.
• Recoveries aren’t guaranteed. Plenty of former market leaders never got back to their highs.
• The math works against you. A 50% drop needs a 100% gain to break even.

A 40% drop in a stock that’s half your net worth cuts your total wealth by 20%.

The tax cost, in perspective

The main reason people don’t diversify is the tax bill. It helps to put a number on it.

Say you own $1,000,000 of company stock with a $200,000 cost basis, held more than a year. Selling all of it creates an $800,000 long-term gain. At the top federal rates, 20% capital gains plus the 3.8% net investment income tax, that’s about $190,000, before state tax.

That’s a lot of money. But a 30% drop in the stock would cost $300,000, and you’d still owe tax on the remaining gain when you sell. The tax is the known cost of lowering a risk that’s much larger and unknown.

For 2026, the 20% long-term capital gains rate starts at $613,700 of taxable income for married couples filing jointly ($545,500 single). The 3.8% net investment income tax applies above $250,000 of modified adjusted gross income for joint filers ($200,000 single).

Ways to diversify

1. Sell on a schedule

The simplest approach is to sell a set amount each quarter or each year until you reach your target. Spreading sales across tax years can keep more of your gain in a lower bracket, and it removes the pressure of picking the perfect day. If you’re subject to blackout windows, a Rule 10b5-1 plan can run the sales for you.

2. Sell the right lots first

Not every share has the same tax cost. Shares with a high cost basis, like recent RSU vests, can often be sold with little tax. Shares held less than a year are taxed at ordinary rates, so waiting a few weeks for long-term treatment can be worth it.

3. Offset gains with losses

Losses elsewhere in your portfolio can offset gains on company stock. Tax-loss harvesting, sometimes done through a direct indexing account that holds individual stocks, can create losses over time to absorb future gains. Watch the wash-sale rule when your company keeps issuing you new shares.

4. Give shares instead of cash

If you give to charity, appreciated stock held more than a year is often the best thing to give. You can generally deduct the full market value and never pay tax on the gain. A donor-advised fund lets you give a large block of shares in one year and decide which charities get the money over time.

Starting in 2026, if you itemize, only charitable gifts above 0.5% of your adjusted gross income are deductible, and for people in the 37% bracket the tax benefit is capped at 35%. Gifting appreciated stock still avoids the capital gains tax entirely.

5. Exchange funds

An exchange fund lets you contribute your shares to a partnership with other investors’ stocks, in return for a share of the combined, more diversified pool. There’s no tax when you contribute. In exchange, you generally have to stay in for about seven years, the fees are higher than an index fund, and these funds are usually limited to investors who meet high wealth thresholds.

6. Hedging

Options strategies like collars can limit losses on a position you keep. They’re complex, can have tax consequences of their own, and many companies prohibit employees from hedging company stock. Check your insider trading policy first.

7. Stop adding to it

The easiest diversification is not adding more. Selling RSUs as they vest and selling ESPP shares soon after purchase keeps the position from growing while you work down what you already have.

Setting a target

A good plan answers three questions:

1. Where do you want to end up? For example, company stock below 20% of your net worth.
2. How fast? Over one year, three years or five.
3. What’s your tax budget each year? How much tax you’re willing to pay annually to get there.

The answers turn a vague worry into a schedule you can follow, even when the stock is doing well and selling feels wrong.

Common questions about concentrated stock

How much of my net worth should be in one stock?

There’s no single right number. Many advisors use 10% as a warning sign, and a common long-term target for employees is somewhere between 10% and 20%.

Is it better to sell all at once or over time?

Selling at once removes the risk immediately but may push more gain into higher tax brackets. Selling over time spreads the tax and the timing risk but keeps you exposed longer. Many people do both: a meaningful sale now and the rest on a schedule.

Can I diversify without paying capital gains tax?

Partly. Giving shares to charity, contributing to an exchange fund and offsetting gains with harvested losses can all reduce or delay the tax. Most plans still include some taxable sales.

What if I think the stock will keep going up?

It might. You can keep some for the upside and still reduce the risk. Diversifying is about making sure a drop in one stock doesn’t change your plans.

Get a second opinion

If one stock makes up a large part of your net worth, a written plan for reducing it is worth having before the next big move in the market.

Related reading:

• Why Holding Vested RSUs Might Be Riskier Than You Think
• How to Exercise ISOs Without Triggering AMT
• Making the Most of Your ESPP

Disclaimer: This content is for informational purposes only and is not tax, legal or investment advice. Strategies like exchange funds and hedging carry their own risks and costs and aren’t right for everyone. Memento Financial Planning is a Registered Investment Adviser in the Commonwealth of Massachusetts.