Much ADO About Taxes
Educating clients on the many options for tax-efficient diversification can be a powerful step in gaining comfort with moving away from a concentrated position that may be adding unnecessary risk to portfolios.
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Key takeaways
- Concentrated stock positions can create unwanted risk in clients’ portfolios. A combination of factors including emotional biases and fear of built-in capital gain consequences can make investors less willing to diversify.
- Move the conversation forward by educating clients about tax-efficient strategies for diversification and remember that while each of these strategies is valuable on its own, they can be particularly powerful when combined.
- Tax-management diversification strategies can be thought of as being in one of these three buckets: Avoid, Defer, and Offset.
Executive Summary
Techniques for Diversifying a Concentrated Position in a Tax-Efficient Manner
Investors are increasingly focused on not just how they invest their money but also how they can optimize their after-tax investment outcomes. Allspring Global Investments is dedicated to helping investors navigate the evolving tax and estate planning landscapes.
Concentrated stock positions can create unwanted risk in investors’ portfolios. Despite the risk, a combination of factors—including emotional biases and fear of built-in capital gains consequences—can make investors unwilling to diversify. By understanding the many tax-efficient diversification options available to them, investors may be more willing to take some of that concentration risk off the table.
Holly Swan, Allspring’s expert on taxes, recently wrote about 10 techniques for diversifying a concentrated position in a tax-efficient manner. She thinks about tax-management diversification strategies as being in one of these three buckets: avoid, defer, or offset.
Avoid:
Tax strategies may focus on reducing or eliminating capital gains exposure altogether. The first example of this is when investors choose to hold certain highly appreciated assets so they can pass through a taxable estate and receive a step-up in basis.
Common lifetime strategies include borrowing against their portfolios to generate liquidity without selling and triggering taxes, gifting appreciated assets to lower‑income family members who are unlikely to owe capital gains tax, and using options strategies to manage risk or monetize positions without selling. Less common strategies available to founders and early-stage investors may allow eligible shareholders to exclude substantial capital gains on investments in qualified small businesses.
Defer:
Certain tax strategies may help investors defer when taxes are recognized, often smoothing the impact over time. One example is systematic diversification, where investors, such as public company executives, sell portions of a concentrated position gradually.
Investors may also use tax loss harvesting to capture losses that offset current or future gains. Other deferral tools include exchange funds, which allow investors to contribute concentrated stock in exchange for a diversified portfolio without triggering immediate taxes, and opportunity zones, which—beginning again in 2027—will allow taxpayers to reinvest capital gains in designated areas in exchange for up to five years of capital gains deferral and, in some cases, partial basis step-up (opportunity zone investments made today are only eligible for gain deferral until December 31, 2026).
Offset:
Offset strategies reduce tax liability by pairing gains with deductions or other tax‑favored actions. A primary example of this is charitable giving, where donating appreciated securities held for more than a year can allow investors to avoid capital gains recognition while receiving a deduction for the asset’s fair market value, subject to income limits.
Investors have many options for tax-efficient diversification, each of which can be a powerful step in moving away from a concentrated position that may be adding unnecessary risk to portfolios. Allspring Global Investments can offer insights into this and more as investors prepare for their financial future.
Allspring Global Investments does not provide accounting, legal, or tax advice or investment recommendations. Any tax or legal information in this brochure is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation.
Allspring does not offer options. Options involve significant risks and are not suitable for all investors.
Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
This material is provided for informational purposes only and is intended for retail distribution in the United States.
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