Diversify a Concentrated Stock Position: What to Do in the United States and Canada
- Tiffany Woodfield
- Jul 22
- 13 min read
Updated: Jul 27
If you have a large, unrealized gain in a single stock, you may be wondering how to diversify your holdings without immediately triggering capital gains taxes.
One strategy used primarily in the United States is an exchange fund. Exchange funds allow investors with highly appreciated stock positions to contribute their shares into a pooled investment fund in exchange for an interest in a diversified portfolio of stocks. In some cases, this strategy can allow investors to diversify their holdings without triggering an immediate taxable event.
However, the rules are complex, particularly in Canada, where tax-deferred diversification strategies are more limited and subject to stricter tax treatment.
Companies that offer these structures are often referred to as exchange fund providers. In the United States, firms such as Morgan Stanley, Goldman Sachs, Fidelity Investments, and Eaton Vance offer exchange fund strategies for eligible investors.
Canadian investors should be aware that these strategies are less common in Canada and may not provide the same tax treatment available in the United States. Purpose Investments In-Kind Exchange is an option for Canadians with a concentrated stock position. We'll cover it later in this article.
In addition to exchange funds, US investors can also consider using a charitable remainder trust (CRT) or borrowing against appreciated stock.
This article is for educational purposes only and should not be considered tax, legal, or investment advice. Speak with a qualified portfolio manager or cross-border financial advisor before implementing this or any other strategy.
Written by Tiffany Woodfield, Senior Wealth Advisor, Portfolio Manager, CRPC®, CIM®, TEP® and John Woodfield, Portfolio Manager, CIM®, CFP®
Key Insights:
Account selection has a large impact on after-tax wealth.
Diversifying a concentrated stock position does not always require selling shares and triggering immediate capital gains tax.
Some investors use exchange funds or in-kind exchange strategies to diversify concentrated stock positions tax-efficiently.
Donating appreciated stock may eliminate capital gains while generating valuable charitable tax deductions or credits.
Holding stocks longer than one year can significantly reduce capital gains tax rates in the United States.
Table of Contents:
Is Your Portfolio Too Concentrated?
A portfolio can become too concentrated when one stock or sector starts driving too much of your overall financial future.
A company stock may rise sharply for years, or you may accumulate a large position through employer stock programs such as restricted stock units (RSUs), stock options, or employee share purchase plans (ESPPs). What once looked balanced can turn into a portfolio where 50% or more of your wealth depends on a single business.
Let's say you're a 55-year-old tech employee with $4 million in investments. But $2.5 million is tied to one tech stock.
If that company drops 40%, your portfolio has gone down by $1 million. This is a vulnerable financial position to be in. Indeed, concentration risk can expose investors to market downturns, industry disruptions, and company-specific problems
5 Ways Concentrated Stock Positions Can Create Hidden Risk
A concentrated position may feel safe when the stock keeps rising.
However, even successful companies can experience sharp declines. Investors with a large percentage of their net worth tied to one stock often face greater volatility, tax complications, and emotional stress than they expect.
1. Employer Stock Can Create Double Risk
Many concentrated stock positions come from stock compensation, restricted stock units (RSUs), executive stock options, or long-term employment at one company.
This can create double exposure because both employment income and investment wealth may depend on the same company. If something goes wrong with your employer, you could find yourself without a job at the same time that your portfolio is tanking.
2. Company-Specific Risk
A single company can experience problems even when the broader market is performing well.
A product failure, regulatory issue, or change in leadership can cause a stock to drop quickly. If a large portion of your wealth is tied to one company, that decline can have a major impact on your financial future.
3. Market and Sector Risk
Some concentrated positions are heavily tied to one sector, such as technology, energy, or banking.
If that sector experiences a downturn, multiple companies in the industry may decline simultaneously. Even strong businesses can fall during broader market selloffs, recessions, or periods of heightened volatility. If your holdings are too concentrated in a single sector, you place yourself in a risky position.
4. Tax Risk
Large, unrealized capital gains can make investors hesitant to diversify because selling shares may trigger a significant tax bill.
Over time, this can create a situation in which tax concerns impede sound portfolio management decisions and increase overall concentration risk.
5. Emotional Decision-Making Risk
Investors often become emotionally attached to a stock that created significant wealth.
This can make it difficult to reduce exposure even when the position becomes objectively risky. Some investors also fear regret if the stock continues rising after they sell. This emotional connection can lead to delayed decisions and greater financial exposure over time.
🇺🇸 How to Diversify Your Concentrated Stock Holdings in the United States
At SWAN Wealth, we speak with many Americans moving to Canada who hold highly appreciated stock positions and are worried about capital gains taxes.
It's not uncommon for clients to have a single appreciated stock which is now making up a large portion of their portfolio.
This lack of diversification is risky.
US investors with highly appreciated stock positions generally cannot sell and reinvest into a diversified portfolio without triggering capital gains tax. However, there are several well-established and IRS-recognized strategies that allow diversification while deferring capital gains tax and, in some cases, reducing or eliminating the eventual tax burden through estate planning.
There are three main strategies that investors may consider when diversifying concentrated stock holdings: exchange funds, charitable remainder trusts (CRTs), and borrowing against the appreciated stock.
1. Exchange Funds
Exchange funds are among the most effective strategies for diversifying a concentrated stock position while deferring capital gains tax.
An exchange fund allows an investor to contribute appreciated stock into a pooled investment partnership on a tax-deferred basis. Other investors contribute different appreciated securities, creating a diversified pool of assets.
The contribution is made in-kind. In return, the investor receives an ownership interest in a diversified partnership portfolio. Because no sale occurs, there is generally no capital gains tax at the time of contribution.
The tax deferral is permitted under Internal Revenue Code Section 721.
Exchange funds generally require investors to remain invested for at least seven years. At the end of the holding period, investors may redeem their partnership interests for a diversified basket of securities. The original cost basis carries through, so taxes are deferred until the distributed securities are eventually sold.
In other words, the exchange fund does not eliminate the gain on the original stock position. It merely allows you to diversify without triggering that gain immediately.
Many investors continue holding these securities long term or until death.
Under current US tax law, assets included in a taxable estate generally receive a step-up in basis, which may reduce or eliminate embedded capital gains for heirs.*
Exchange funds are generally suitable for investors with large, concentrated positions and substantial unrealized gains (often several million dollars or more) who seek diversification without immediate tax consequences.
Common limitations include:
Minimum investments often range from $1 million to $5 million or more.
Accredited investor requirements usually apply.
Investors generally need a highly appreciated publicly traded stock.
Liquidity is limited.
*Current tax treatment is based on existing US law and could change in the future.
2. Charitable Remainder Trusts
A charitable remainder trust offers another method to diversify a highly appreciated stock position without an immediate capital gains tax.
The investor contributes appreciated securities to an irrevocable trust. The assets held in the trust are managed by a trustee who pays out a regular income stream to beneficiaries. The trust is a tax-exempt entity, which means it can sell the securities without paying capital gains tax. It can then reinvest the proceeds in a diversified portfolio.
In return, the investor receives an income stream from the trust, typically for life or a fixed term of years.
At the end of the trust term, the remaining assets must go to charity and cannot pass to heirs. This strategy permanently relinquishes ownership of the principal. However, it provides income, diversification, and an upfront charitable tax deduction.
CRTs are often used when charitable giving and estate planning objectives align with diversification and tax-deferral goals. You would need to speak to an estate planner to determine if this is a fit for you.
3. Borrowing Against Appreciated Stock
Another approach involves borrowing against the appreciated stock rather than selling it.
Loan proceeds can be used to build a separately diversified portfolio while the original stock position remains intact. Borrowing does not create a taxable event, allowing the investor to access liquidity without realizing gains.
If the investor holds the stock until death, current US tax law provides a step-up in cost basis, effectively eliminating the deferred capital gain for heirs. If the stock declines significantly, lenders may require additional collateral or partial repayment of the loan.
This approach requires careful risk management, as it introduces leverage, interest cost, and potential margin risk.
Avoid Strategies that Do Not Defer Existing Capital Gains
It is important to note that simply reallocating into mutual funds, exchange-traded funds, or direct indexing strategies does not defer existing capital gains.
Selling appreciated stock in any form usually triggers taxation. While tools such as direct indexing may help manage taxes on future gains and generate tax losses, they do not solve the problem of embedded gains in a concentrated position. You may wish to avoid this type of rebalancing, as it could result in a large tax hit.
🇨🇦 How to Diversify Your Concentrated Stock Holdings in Canada
In Canada, investors can use a Purpose Investments in-kind exchange to diversify a concentrated stock position.
A Purpose Investments in-kind exchange allows an investor to transfer shares of a single publicly traded stock in-kind — meaning without selling the shares for cash first — into a Purpose-managed fund or structured investment solution.
Once inside the structure, Purpose Investments uses portfolio construction techniques and derivatives that aim to reshape the risk and return profile of the investment. The objective is typically to reduce concentration risk and volatility while avoiding an immediate forced sale of the stock.
The term in-kind describes how the shares are contributed. It does not, by itself, determine the tax outcome.
What This Strategy Can Do
A Purpose in-kind exchange may:
Reduce reliance on a single stock
Lower downside risk and volatility
Improve diversification of economic exposure
Potentially defer some tax through timing and structure
Avoid selling the stock outright at the outset
What This Strategy Cannot Do
Under Canadian tax law, this strategy:
Does not eliminate capital gains tax
Does not allow a true tax-free swap into a diversified portfolio
Does not replicate US-style exchange funds
Does not permanently defer taxation
If you are a US person:
The exchange is considered a taxable event by the IRS so would not be recommended
The IRS would consider the Purpose Fund to be a PFIC which has additional complications and negative tax consequences
Canada generally does not permit tax-free pooling of appreciated securities solely for diversification purposes in the same manner as US exchange funds. While the structure may defer or smooth the timing of tax in some cases, the embedded capital gain remains.
How This Strategy Works in Practice
A Purpose in-kind exchange works by transferring the stock directly into the structure instead of selling the shares for cash first.
The strategy is designed to help defer, manage, or smooth the timing of capital gains over time rather than eliminate taxation entirely. The specific tax outcome depends on the structure used and the investor’s individual circumstances.
When a Purpose In-Kind Exchange May Be Appropriate
This approach may be appropriate when:
Selling the stock immediately is psychologically or practically difficult
The main objective is risk reduction rather than tax elimination
The investor has a long-term time horizon
Other strategies such as staged selling, borrowing, or charitable planning are not suitable at this time
The investor has reviewed cross-border tax implications, including potential US PFIC treatment and whether the in-kind transfer could be taxable for US purposes
5 Additional Diversification Tips
Before selling appreciated shares, investors should understand the potential tax liability created by the sale.
1. Know Your Cost Basis Before You Sell
In the US, your cost basis plays a major role in determining how much tax you may owe when selling appreciated shares.
In Canada, the adjusted cost base (ACB) affects the size of your capital gain, while in the US, specific tax lots and holding periods can also impact taxation. Reviewing this information before selling can help avoid surprises and support better tax planning.
For individuals moving to Canada who are not US persons, or who have formally surrendered a green card and are not covered expatriates, there may be planning opportunities to sell after becoming Canadian tax resident.
In some cases, this may result in no US capital gains tax and a stepped-up Canadian adjusted cost base; however, timing, residency status, and expatriation rules are critical and should be reviewed with a qualified cross-border tax advisor before selling.
2. Financial Planning Can Help You Choose the Right Strategy
A strong financial plan can help you decide how much concentration risk is reasonable for your situation.
Planning can also help balance taxes, retirement income needs, cash flow, charitable goals, estate planning, and long-term investment growth before making large portfolio changes.
3. Consider Selling Shares Gradually to Reduce Risk
Some investors reduce concentration risk slowly, instead of selling the entire position at once.
Selling shares gradually over several years may help spread out capital gains taxes, reduce emotional decision-making, and lower the pressure of trying to time the market perfectly.
4. What to Know Before Diversifying in the US and Canada
Cross-border investors often face additional planning challenges when diversifying concentrated stock positions.
Tax treatment can differ significantly between Canada and the United States, especially for capital gains, trusts, exchange funds, and derivatives. Currency exchange rates may also affect investment returns and tax reporting.
Residency status, account location, and the type of investment account being used can complicate the strategy even more. Investors with cross-border ties should review US and Canada reporting requirements before making major portfolio changes.
5. Plan for Executive Lockups and Insider Restrictions
Some executives, founders, and corporate insiders cannot freely sell shares whenever they choose.
Blackout periods, insider trading policies, SEC filing requirements, and company-specific restrictions may limit when shares can be sold or hedged. These rules can affect diversification timing and should be reviewed carefully before building a strategy.
Important Risk and Tax Considerations
Diversifying a concentrated stock position can help reduce market risk, but investors should remember that all investing involves risk, including the possible loss of principal.
Before making changes, it is important to understand how selling appreciated shares may affect your income tax situation and overall tax liability. The right strategy should also reflect your personal risk tolerance, long-term goals, liquidity needs, and time horizon.
Protecting the Wealth You’ve Built
For many affluent families, concentrated stock planning is closely connected to estate planning, charitable giving, and multigenerational wealth transfer goals.
A concentrated stock position can create significant wealth, but it can also increase portfolio risk if too much depends on one company or sector.
For US investors, exchange funds may help diversify appreciated stock positions while deferring capital gains tax. Other strategies, such as charitable remainder trusts (CRTs), staged selling, and borrowing against stock, may also be appropriate, depending on the investor’s goals and tax situation.
For Canadian investors, the rules are generally stricter. In addition, strategies such as Purpose Investments in-kind exchange may help manage concentration risk, but they do not eliminate capital gains tax.
Because these decisions often affect investment planning, taxes, retirement income, estate planning, and family wealth transfer, investors should speak with a qualified portfolio manager and cross-border financial advisor before implementing a strategy.
Common Questions
What is a concentrated portfolio?
A concentrated portfolio is a portfolio where a large percentage of investments are tied to a single stock, sector, or asset class. This can increase both growth potential and downside risk.
How can you diversify a concentrated stock position while minimizing taxes?
Investors may reduce taxes by selling shares gradually, using tax-loss harvesting, donating appreciated shares to charity, borrowing against stock, or using structured strategies such as exchange funds in the US. The right approach depends on your country, tax situation, risk level, time horizon, and whether the stock is held personally or corporately.
Should you sell a concentrated stock position all at once or gradually?
Many investors choose to sell gradually to reduce market timing risk and spread capital gains taxes across multiple years or potentially remain in a lower tax bracket. However, waiting too long can increase concentration risk if the stock falls sharply.
What is the best way to diversify company stock?
The best strategy depends on the investor’s tax exposure, financial goals, and level of concentration risk. Some investors use staged selling, while others use exchange funds, charitable planning, or borrowing strategies. A diversified portfolio across different industries and asset types can help reduce dependence on one company’s performance.
What is tax loss harvesting?
Tax loss harvesting is a strategy where an investor sells investments at a loss to help offset taxable capital gains from other investments. In some cases, this can reduce the overall tax bill during diversification. Canadian and US tax rules differ, including rules about buying back the same investment too quickly.
What are Purpose Investments in-kind exchange funds?
A Purpose Investments in-kind exchange allows investors to transfer shares of a concentrated stock position into a Purpose-managed structure without first selling the shares for cash. Purpose may then use portfolio management strategies and derivatives to help reduce concentration risk and reshape the investment exposure over time.
These structures operate in Canada and do not eliminate capital gains tax.
What is asset allocation?
Asset allocation refers to how investments are divided across stocks, bonds, cash, real estate, and other asset classes. A concentrated stock position can disrupt a balanced asset allocation by placing too much exposure in one company or sector.
Next Steps
If you’re a Canadian resident or are planning on moving to Canada or the US and need assistance with moving and optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management.
Read More
If you’re planning a cross-border move, these articles and guides will help simplify your move and ensure everything is covered.
About the Authors
TIFFANY WOODFIELD
Tiffany Woodfield is a Portfolio Manager licensed in Canada and the USA, a Chartered Investment Manager (CIM), a Chartered Retirement Planning Counselor (CRPC), a Trust and Estate Practitioner (TEP) and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany advises clients who live in Canada and the United States and want to simplify their cross-border financial plan, move their assets across the border, and optimize their investments to minimize their tax burden. Together, Tiffany and John Woodfield help their clients simplify their cross-border finances and create long-term revenue streams that will keep their assets safe whether they live in Canada or the U.S.
JOHN WOODFIELD
John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), and a Certified Financial Planner (CFP), and in 2007 was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield’s clients are families, individuals and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.
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