When a specific stock in your portfolio just keeps going up, it’s easy to hang on to it. Add a strong bull market and reinvested dividends, and it is easy to see how investors end up with a concentration in a highly appreciated stock.
Having a highly appreciated asset looks great on paper. Your investment could be up 1,000% or more. Some invested in the early days and have held the position for 20 years, while others may have acquired shares through profit sharing or stock incentive plans. Regardless, it is common to see an individual holding shares of a company that sold for less than $30 per share in 2002 while it is more than $300 per share today.
Unfortunately, a highly appreciated stock presents quite a few problems. First a concentration problem—because of the outsized gain, the stock position could be much more than 5% of your overall portfolio. Second, you have a tax problem. If you sell, you will have to recognize the capital gains, which could be significant even with the favorable long-term gains rates. Third, you may have an estate planning issue. If you want your assets to go to your heirs, you could hold the appreciated stock in your portfolio, and upon your death, your heirs will receive a step-up in basis, meaning their initial basis is the fair market value as of the date of your death. However, your death could be many years from now, and tax laws could change or you’d need to hold the stock for another 20-30 years.
Even with our current bear market, a 20-year holding can have a significant gain. You could sell shares and pay the tax due; however, let’s consider a few advantageous ways to address this situation. If you’ve kept good records of your reinvested dividends, you should be able to identify certain tax lots that would allow you to find a lot with a loss. You can also take advantage of this year’s down market, recognizing other losses in your portfolio and sell the tax lot with the most gain so that your losses and gains offset each other. Working with your financial and tax advisers, you can develop a strategic plan to sell your highly appreciated stock and minimize your taxable gains.
You can gift up to $16,000 in 2022 or $17,000 in 2023 (double if married filing jointly) to any individual without incurring a gift tax. Gifting a non-cash asset transfers the tax implications to the recipient because of carryover basis. If you gift $16,000 in stock for which you paid $1,350 and the recipient sells it, they will owe taxes on the $14,650 capital gain.
Instead of writing a check to your church or favorite charity, you can give your stock shares. In doing this, you can avoid the capital gains tax on the shares. Furthermore, 501(c)(3) organizations are tax-exempt and will not owe capital gains tax on the stock shares.
A concentrated position in a significantly appreciated asset is quite common, and often investors adversely hang on to these positions to avoid paying taxes—often to the detriment of their overall portfolio.
If you have questions on how to reduce your highly appreciated stock position, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the December 17, 2022 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
