How should I deal with concentrated stock positions?
Many successful investors hold portfolios that are too heavily concentrated in a single stock. Sometimes the stock that dominates a portfolio is that of a current or former employer. In other cases, the oversized holding was acquired through a merger or acquisition. Or the stock may have achieved its dominant position simply by outperforming other holdings over time.
Whatever the background, investors with concentrated stock positions face the risk that a change in the fortunes of a single company could jeopardize their financial well-being. Lehman Brothers, Enron and other prominent failures of recent decades remind investors that no company, no matter how strong or well-positioned it may seem, is immune from risk. Most financial advisors therefore recommend that clients restrict single-stock positions to prudent limits, typically not more than 10% of portfolio value.
For taxpaying investors, the biggest impediment to diversifying low-cost stock is often capital gains taxes. Selling low-cost stock from a taxable account involves a tradeoff between the known upfront tax and transaction costs and the uncertain future benefits of risk reduction. For many investors, capital gains taxes (including state and local taxes) of up to 37% of the value of their investment may seem too high a price to pay for diversification.
There are ways other than a taxable sale of stock by which you can address the risk of concentrated stock positions. In evaluating your options, you may want to consider the information below.
Concentrated Stock Position CalculatorFirst, let's calculate the total amount of capital gains taxes you would pay if you sold your stock position today.
Max: $200,000.00
Max: 2,000,000
Max: $1,000.00
The current market value of your stock position is 0.0.
Based on your income level and where you live, your combined federal, state and local long-term capital gains tax rate1 is . Your short-term capital gains would be . If you liquidated2 your stock position today, you would pay0.0
in capital gains taxes.
TO RECOVER THE AMOUNT OF TAXES PAID, YOU WOULD NEED TO REALIZE A RETURN OF0.0
to get back to where you started.
Next, let's consider the impact of capital gains taxes on your net portfolio returns over the long term.If you liquidate your concentrated stock position today, pay capital gains taxes and reinvest your net proceeds into a replacement portfolio: IF YOU ACHIEVE YOUR ESTIMATED RATE OF ANNUAL RETURN FOR 0 YEARS, YOUR PORTFOLIO VALUE AT THE END OF YOUR HOLDING PERIOD WOULD BE0.0
IF YOU THEN LIQUIDATE2, 3 AND PAY CAPITAL GAINS TAXES AT THE RATES THAT NOW APPLY TO YOU, YOUR NET PROCEEDS WOULD BEIF YOU ACHIEVE YOUR ESTIMATED RATE OF ANNUAL RETURN OVER YOUR ACTUARIAL LIFE EXPECTANCY,4 THE NET VALUE OF THE PORTFOLIO TO YOUR ESTATE5 WOULD BE0.0
If you could diversify your concentrated stock position today without incurring capital gains taxes: IF YOU ACHIEVE YOUR ESTIMATED RATE OF ANNUAL RETURN FOR 0 YEARS, YOUR PORTFOLIO VALUE AT THE END OF YOUR HOLDING PERIOD WOULD BEIF YOU THEN LIQUIDATE2, 4 AND PAY CAPITAL GAINS TAXES AT THE RATES THAT NOW APPLY TO YOU, YOUR NET PROCEEDS WOULD BE7...AND ACHIEVE YOUR ESTIMATED RATE OF ANNUAL RETURN OVER YOUR ACTUARIAL LIFE EXPECTANCY,4 THE NET VALUE OF THE PORTFOLIO TO YOUR ESTATE5 WOULD BEThat’s a difference of $1,296,796. Diversifying your concentrated stock position on a tax-deferred basis would enable you to increase the net liquidation proceeds at the end of your holding period by XX.XX%. Eaton Vance is positioned to help advisors address the most significant issues facing their leading clients. Learn more about our wealth strategies for concentrated stock. Learn More About How Taxes Affect Your Investment ReturnsWhat do I pay in taxes on my investments?
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The output of this calculator is for educational purposes only and should not be considered investment, legal or tax advice. It is intended for use by U.S. individual taxpayers resident in the 50 states or the District of Columbia, and is not applicable to trusts, estates, corporations or persons subject to special rules under federal, state or local income tax laws. The indicated capital gains tax treatment applies to positions in securities held outside qualified retirement plans and other tax-deferred or tax-exempt investment vehicles. The output is general in nature and is not intended to serve as the primary or sole basis for investment or tax-planning decisions.
For more individualized information, you should consult your tax advisor or investment professional. You bear sole responsibility for any decisions you make based on the output of this calculator. The calculator makes certain assumptions that may not apply to you. The calculator has many inherent limitations, and individual results may vary.
Tax rates and tax laws are updated through March 15, 2019. Indicated rates are the combined net federal, state and local income tax and net investment income (NII) tax rates that apply to an incremental dollar of your long-term capital gains (LTCGs), which may vary from your average tax rate for LTCG. The displayed LTCG tax rates have been rounded to the nearest hundredth of a percent.
Diversification does not assure a profit or prevent against loss.
A Taxable income is your annual gross income for federal tax purposes, less adjustments and the federal deductions you claim (standard or itemized).
B The "Married Filed Separately" and "Qualifying Widow(er)" filing status are not given as options on this calculator, but may apply to you.
1 LTCGs are gains recognized on the taxable disposition of a capital asset held for more than one year. LTCGs are generally subject to federal income tax at rates up to 20% (plus the NII tax that applies – see below); higher LTCG rates apply to collectibles, section 1202 qualified small business stock and section 1250 real property, the effect of which is not shown here. This analysis does not consider the federal alternative minimum tax (AMT) or take into account the deduction for state and local taxes paid (limited to $10,000 annually) that is available if you itemize deductions.
The calculation of your total LTCG tax rate assumes that your taxable income for state tax purposes equals your federal taxable income. Material variations could cause your total LTCG tax rate to be overstated or understated. This analysis ignores the AMT imposed by certain states (CA, CO, CT, IA, MN), the AR alternate low-income tax table, the phasing out of itemized deductions at higher income levels that applies in certain jurisdictions (CA, DC, HI, IA, ME, MN), the limited deductions for federal income taxes paid that are available in certain states (MO, MT, OR) and the limited itemized deductions for state and local income taxes paid that are available in certain states (AZ, GA, HI, LA, ND). Indicated total LTCG tax rates for AL, IA and LA residents are net of the deduction for federal taxes paid that are available in those states. In most states, LTCGs are taxed at the same rates as ordinary investment income. Certain states exclude a portion of LTCG from taxable income: AR (50%); AZ (25%, only for assets acquired after 12/31/11); ND (40%); NM (50%); SC (44%); and WI (30%), the benefits of which are shown. MT provides a tax credit of 2% for net capital gains, the benefit of which is shown. Net LTCGs in excess of $10 million are excluded from AR taxable income, net LTCGs of up to $5,000 annually are excluded from VT taxable income and net capital gains of up to $1,000 annually are excluded from NM taxable income, the benefits of which are not shown. LA and OK exclude from taxable income all or a portion of LTCGs realized on sales of stock of in-state companies held for multiple years and certain other states provide favorable treatment of limited categories of LTCGs, the benefits of which are not shown. Mutual fund capital gain distributions paid to TN taxpayers are subject to 3% tax, the effect of which is not shown.
The indicated total LTCG tax rate includes local income tax rates imposed by certain cities, counties and other local jurisdictions on investment income and gains. In addition to the indicated local income taxes, school districts in IA impose a surtax of up to 17% of residents’ IA income taxes and OH residents may be subject to school district taxes of up to 2% of OH taxable income, depending on where you live. The impact of these and other local income taxes that may apply to you is not considered in this analysis. If applicable to you, your total LTCG tax rate would be higher than shown.
The indicated total LTCG tax rate includes the 3.8% Net Investment Income (NII) federal tax that applies to individuals, estates and trusts with modified adjusted gross income (MAGI) above applicable threshold amounts ($200,000 for single and head of household; $250,000 for married filing jointly). NII generally includes gross income from taxable interest, dividends, annuities, royalties and rents (unless derived from a trade or business that isn’t a passive activity or trading business) and net gains on assets generating NII, net of allowable expenses. For the purposes of this calculator, your MAGI is assumed to equal your taxable income.
2 Liquidation values shown in this analysis do not reflect the impact of commissions and other selling costs you may incur, which would lower the net sale proceeds and amounts available for reinvestment.
3 If you sell your concentrated stock position, pay capital gains taxes on the amount of realized gain and then reinvest the after-tax proceeds in a replacement portfolio, your newly acquired positions will have a cost basis equal to the reinvestment amount, which cost basis is used in calculating the net liquidation proceeds to you of selling your portfolio investments at the end of your expected holding period. To simplify the analysis, returns of the replacement portfolio are assumed to consist exclusively of long-term capital gains realized upon liquidation. Taxes paid on current income and gains realized over the holding period of the replacement portfolio would lower your net returns at liquidation.
4 In the analysis of diversifying your concentrated stock position without recognition of gain, the cost basis of your concentrated stock position is assumed to carry over to the replacement portfolio, which cost basis is used in calculating the net liquidation proceeds to you of selling the replacement portfolio at the end of your expected holding period. To simplify the analysis, returns of the replacement portfolio are assumed to consist exclusively of long-term capital gains realized upon liquidation. Taxes paid on current income and gains realized over the holding period of the replacement portfolio would lower your net returns at liquidation.
5 Your actuarial life expectancy is assumed to equal the midpoint of the male and female life expectancies as of 2013 (rounded to the nearest whole number of years) for someone your age, based on information available on the Social Security Administration Web site.
6 Upon your death, the tax basis of assets included in your estate will increase or decrease to their fair market value as of the date of death or six months thereafter, eliminating potential income tax liability for previously accrued capital gains. Assets included in your estate not designated for charitable purposes or other permitted exclusions will be subject to federal estate tax at a current rate of 40% to the extent the value of your taxable estate plus the cumulative amount of your non-excluded lifetime gifts exceeds the federal gift and estate tax exemption amount, which is currently $11.4 million for individuals and $22.8 million for married couples. Certain states also impose estate taxes. This analysis does not consider federal or state estate taxes.
The information provided above is not intended to reflect the results of any specific Eaton Vance investment offering or investment program. Investors should consult with their investment professional and tax advisor before investing. Past performance is not a guarantee of future results.
