No one likes paying capital gains taxes.
So when an investor has a large position in a stock that has appreciated substantially, the instinct to avoid selling can be understandable.
Suppose you own $1.2 million of one stock with a $200,000 cost basis.
That means you are sitting on $1 million of unrealized gains.
Selling the entire position could create a very large tax bill. Depending on your tax situation, that bill might run well into six figures.
Faced with that number, many investors come to a simple conclusion:
“I’m not selling.”
But that decision may deserve a closer look.
The Tax Bill Is Visible. The Risk Is Not.
A tax bill is concrete.
You can calculate it. You can see exactly how much money would leave your account.
The risk of continuing to hold a concentrated stock position is different. Nothing happens the day you decide not to sell. There is no invoice and no immediate loss.
But the risk is still there.
If that $1.2 million position falls 30%, its value drops to $840,000.
That is a $360,000 decline.
The point is not that the stock will fall 30%. It may continue to rise.
The point is that avoiding a known tax cost may mean continuing to expose a much larger amount of wealth to the fortunes of a single company.
A tax bill is a cost.
Concentration is a risk.
Those are not the same thing.
Would You Buy the Stock Again Today?
One of the most useful questions for someone with a large concentrated position is also one of the simplest:
If you had $1.2 million in cash today, would you use all of it to buy this stock?
If the answer is no, it is worth asking why continuing to own $1.2 million of it automatically feels like the right decision.
This is where behavior can begin to influence planning.
Investors may feel unusually confident in a company they know well. They may become anchored to a previous high price. They may hesitate to sell because they fear watching the stock rise afterward.
Or they may simply feel more comfortable doing nothing.
But doing nothing is still an investment decision.
It Does Not Have to Be All or Nothing
The good news is that the choice usually is not simply:
Sell everything today
or
Never sell at all.
A concentrated position can often be reduced gradually.
An investor might sell shares over several years rather than all at once. Sales can potentially be coordinated with lower-income years, available capital losses, charitable gifts, or other tax-planning opportunities.
Some investors may establish a systematic schedule for selling a certain percentage of the position each year.
Others may use predetermined price targets or allocation limits.
If charitable giving is already part of the plan, donating appreciated shares instead of cash may also help reduce the position without first realizing the embedded capital gain.
The goal is not necessarily to eliminate the position immediately.
It is to create a deliberate strategy rather than allowing taxes alone to dictate the investment decision.
The Bigger Question
There is nothing wrong with wanting to minimize taxes.
Good planning should consider taxes.
But tax minimization should not become the only objective.
A client may save money on taxes by refusing to sell, while simultaneously taking more investment risk than the financial plan requires.
That becomes especially important when the concentrated position is tied to retirement spending, a future home purchase, estate goals, or other objectives that depend on the money actually being there.
The question is not simply:
“How much tax would I pay if I sold?”
A better question is:
“What am I risking by continuing to hold this position, and is there a more thoughtful way to reduce it?”
The Hanover Perspective
A large embedded gain can make diversification feel expensive.
But the tax bill is only one side of the equation.
The goal should not be to avoid taxes at any cost. It should be to make the best after-tax decision for the financial plan as a whole.
Sometimes that means holding the stock.
Sometimes it means selling.
And sometimes the best answer is a carefully designed path somewhere in between.