Challenge

Do you have a large unrealized gain on your stock?

The shares of your current or former employer’s stock have appreciated significantly and now you have a large unrealized gain on them. This means that if you sell some or all of your shares to diversify or create cash, you might have a very large capital gains tax due to the IRS. You’re not sure what to do and how to approach making decisions about how much stock to hold.

Solutions

You can simply hold all of your shares – never selling – and avoid paying capital gains taxes.

Pros: You don’t create realized gains by selling shares and paying taxes on those gains.
Cons: Your stock potentially becomes a much larger part of your net worth which increases the risk to your lifestyle or – even worse - your gains disappear if the stock price falls dramatically in the future.

You can sell some or all of your shares in one year or over multiple, future calendar years.

Pros: You reduce your risk of holding most of your wealth in one company. You can then diversify to protect your wealth and more securely meet your financial goals.
Cons: You may need to pay capital gains taxes each year you sell shares.

You can use your highly appreciated stock to make charitable donations.

Pros: You can generate a potential tax deduction based on the total market value of the shares you donate to charities you’re passionate about. Plus, the charity doesn’t pay tax on the appreciation when they sell your shares to turn your shares to cash.
Cons: The shares and the value they have is no longer yours to use once you donate them to charity or a Donor Advised Fund (DAF).

You may be able to consider borrowing money using your publicly traded shares as collateral.

Pros: You can potentially borrow the cash you need by pledging your shares as collateral which means you don’t have to sell your shares – which creates realized capital gains - to access cash.
Cons: Borrowing against your shares in your company is typically not allowed if you still work for the company. Even more importantly, borrowing against your stock is risky since your shares may fall in value which could create a margin call which triggers forced selling at a relatively low price.

You may be able to consider building a customized stock index portfolio around your highly appreciated shares to strategically reduce it over time using tax loss harvesting.

Pros: The shares you add around your concentrated stock position will begin to diversify your investments. Additionally, some of these stocks go up and some go down. Selling and replacing the stocks that went down to “harvest the losses” while holding onto the stocks that have unrealized gains can help reduce your potential realized capital gains when selling highly appreciated stock over time.
Cons: This strategy is only available if you have at least $250,000 to invest in a non- retirement account and may not generate much in the way of tax losses if the stock market only goes up with low volatility from inception.

Next Steps

We’ve helped clients who face choices just like these with their highly appreciated stock. We’ll collaborate with you so you can determine the pros and cons of your individual situation. Through conversation and planning, we can run “what if” scenarios tailored to your concerns and goals to show you a range of possible paths to consider. We’ll continue to update your plan through ongoing communication so it stays current as you change and the world changes.

Please note: The above case study is hypothetical – it does not involve an actual client. Case studies are intended to illustrate the hypothetical experience of a fictitious client based on a scenario that an actual client might experience. Case studies are designed to illustrate how we may provide investment advisory services through Mariner Platform Solutions (MPS) to our clients. Remember that no two clients, situations, or experiences are exactly alike. Case studies are not to be construed as an endorsement or testimonial of any of its past or current clients, nor any assurance that we may be able to help any client achieve the same results. To the contrary, no case study should be construed by a client or prospective client as a guarantee that they will experience a certain level of results or satisfaction if engaged in investment advisory services available through MPS.

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