Options to Manage Tax Implications of Concentrated Stock

It’s common for executives to accumulate large amounts of company stock shares. However, diversification is essential to a healthy portfolio. So, how do you make the most of concentrated stock?

The key to unlocking the hidden value in your company stock could lie in repurposing some of those funds in the most tax-efficient way possible.

Here are some options to explore to find value in your concentrated stock while managing the tax implications.

1. Exchange Fund

An exchange fund is a private placement limited partnership that pools shares you contribute to the fund with shares from other concentrated stock investors to create a diversified investment. After a set period (generally seven years), each exchange fund’s shareholders are entitled to a prorated portion of its portfolio. Taxes are postponed until you sell those shares, and you pay taxes on the difference between the value of the stock you contributed and the price received for your exchange fund shares. Though it provides no liquidity, an exchange fund may help minimize taxes while providing greater diversification when planning for long-term goals. Be sure to check the costs involved with an exchange fund and what other securities it holds.

2. Direct Indexing

Direct indexing is an automated investing strategy where an investment manager uses computer algorithms to buy all or a representative portion of the stocks you would generally own by purchasing an index fund in your account^[1]. The main aim of a direct indexing strategy is to lower your capital gains tax bill by harvesting losses throughout the year as company stock, sector, or overall market declines occur. By contributing your concentrated stock shares, managers of direct indexing strategies will work with you to efficiently unwind your gain.

3. Variable Prepaid Forward Contract

A variable prepaid forward contract (VPFC) is a trading strategy that allows a shareholder to sell shares for future delivery in exchange for immediate cash. As the shareholder, you would receive cash without paying capital gains taxes and stock ownership transfers to the other party at the end of the contract term.

4. 83(b) Election

An 83(b) election allows you to make an election to be taxed on all your shares up front, even those that are unvested, in the tax year those shares are acquired. It also notifies the IRS that you have opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income.

Conclusion

If you’ve been acquiring and holding company stock for several years, its growth has likely afforded you the opportunity of choice. Maximize its value by choosing to use it in a way that supports your financial, family, and charitable goals.

Interested in learning about other options to unravel value from concentrated stock? Read our blog “Unlock Hidden Value: How to Maximize Your Concentrated Stock,” and remember that a Sequoia Financial Group advisor is just a click away to help you achieve your goals.

Sources:

1. https://www.wsj.com/buyside/personal-finance/direct-indexing-4b1563b7#:~:text=Direct%20indexing%20is%20an%20automated,your%20capital%2Dgains%20tax%20bill