Let’s talk about a very “good problem” to have – being stuck with a boatload of stock that’s worth millions… but with a cost basis that barely buys lunch at Whole Foods.

Here’s an example: John has over 50,000 shares of a single stock. If he sold it all, he’d be staring down an $5.5 million gain… on a position with a cost basis of just $250,000. That’s one heck of a tax bill. So, what do you do when your portfolio is concentrated, your basis is low, and you’re trying not to set off fireworks with the IRS?

Here are some of the strategies we would walk through with this client – and what you should consider if you’re in the same (very nice, but very stressful) boat.

Option 1: The Slow and Steady Exit

You can always sell a little each year. Think of it as the tax-efficient version of slowly peeling off a Band-Aid. You spread out your capital gains over time, keep your tax bracket in check, and don’t totally rock your financial boat in any one year.

Pros: Predictable, tax-efficient, manageable.
Cons: You’re still exposed to single-stock risk for longer.

Option 2: Rip the Band-Aid

Just sell it all. Bite the bullet, pay the taxes, and sleep better knowing you’re diversified. Sometimes this is worth it, especially if your financial plan can handle the short-term tax hit for the long-term gain.

Pros: You’re done. You’re diversified. You’re sleeping better.
Cons: The IRS gets a big tip.

Option 3: Get Creative – The Cashless Collar

Now here’s where things get a little fun (at least if you’re a financial nerd like us). Enter the cashless collar, a strategy that protects your downside without writing a check.

Here’s how it works:

• Buy a put to protect yourself if the stock drops (think: insurance).
• Sell a call to offset the cost of the put (think: you’re insuring someone else if the stock takes off).

You’re now locked into a range, like those old bumper cars at Six Flags that only let you veer so far off the track. You bounce between a floor and a ceiling. You can’t fall too far, but you also can’t fly too high.

Wait, What’s a Flex Collar?

Glad you asked. A flex collar is the cool, European cousin of the traditional collar. Here’s what makes it different:

• European-style options: They don’t get exercised early. They only settle at expiration. So, if you sold a call at $123 and the stock jumps to $160, you won’t be forced to sell before the expiration date.
• Cash-settled: No one takes your stock; you just get the difference in cash. Think of it as a financial hug – you stay protected and still own your shares.
• Custom-built: These aren’t found on the shelf. You work with an options desk and market makers to structure it just the way you want.

It’s like commissioning a financial couture piece. Expensive? Not always. Complicated? A little. Worth it? Often.

A Few Important Notes

Before diving into any complex strategy, be careful not to run afoul of constructive sale rules – if you hedge too tightly, the IRS might treat it as if you sold the stock, triggering taxes even if no shares changed hands. That’s why it’s crucial to loop in your CPA before making any moves.

Handling a low-basis concentrated stock position isn’t one-size-fits-all. It’s part tax planning, part portfolio management, and part financial therapy. But the good news is you have options. Whether you sell slowly, take the tax hit, or put on a snazzy custom collar, the key is doing it on purpose and with a plan.

Ready to talk about your options? CLICK HERE to make an appointment.