TFP #014: A Year End "Hack" To Diversify Your Company Stock

Welcome to the 14th edition of the Tech Financial Planning (TFP) newsletter.

When you have a lot of company stock, you also usually have significant gains.

Which means if you sell, you will likely pay a lot in capital gains tax.

But done correctly, you can “hack” your way to diversification and little to no taxes.

In this newsletter, we will break down why you might consider selling more company stock by the end of the year and how to not get killed on taxes.

TL;DR

  • Most portfolios have decent losses this year

  • You can use those losses to offset gains from your company stock 

  • Done correctly, you can diversify a good chunk of your company stock without triggering a big tax bill

A quick overview of tax loss harvesting

I did a Google search for tax loss harvesting and got back 17,400,000 results.

So I won’t bore you with an in depth overview because there are many great examples.

I particularly liked this one from Schwab (good graphics) and this one from Investopedia.

But in general, the goal is to sell any investments at a loss to offset any investments you’ve sold at a gain.

If you don’t have any investments at a gain, you can use the losses to reduce your taxable income by $3,000.

If the loss is greater than $3,000, you can carry the remainder over to the next year.

Using losses to offset big gains in company stock

If you work (or have worked) for a company that had a successful exit, there’s a good chance you have a big position of company stock that has huge unrealized gains.

For example, if you work at Procore, you may have shares with a cost basis of $1, $2, 10, & $22 / share. 

With a current share price of ~$52, those are some significant gains!

And often, people are hesitant to sell because they get hammered with capital gains taxes.

For example, even if your shares have been held long term, you can pay upwards of 20-30% (or more) in total capital gains taxes (state + federal).

So how can we apply tax loss harvesting to your situation?

Unless you’ve been living under a rock, you know that 2022 has been rough for the stock market.

Which means that most people have some positions that are currently at a loss (realized or not).

So, done correctly, you can sell stock at a loss while selling company stock at a gain.

If you nail it, there will be no actual gains.

An example

Your regular portfolio has positions that you bought for $300,000 but now are worth $200,000.

Which means you currently have a $100,000 loss.

You also have company stock that has a basis of $50,000 but is worth $500,000.

Which means you currently have a $450,000 gain.

You know you should diversify some of your company stock, but you’ve been hesitant because you don’t want to get killed on taxes.

In this situation, you could sell your “regular portfolio” for a $100,000 loss while selling enough company stock to trigger a $100,000 gain.

Netted against each other, you would end up at a flat $0 gain / loss for the year.

The results?

  • You successfully sold a good chunk of your company stock

  • There would be no tax impact

  • You can use the resulting money to get into a more diversified portfolio

3 quick notes

  1.  This is a really simple example - most portfolios have numerous positions with different levels of gain and loss. Make sure you do the work to make sure you are getting it right, or work with someone.

  2. Beware of the wash sale. Namely, if you sell at a loss, you can’t buy the same funds right back. You have to wait 31 days.

  3. It’s worth understanding how short term and long term capital gains offset each other

Putting it all together

We aren’t going to be excited that markets are down this year.

But it does provide opportunities.

We want to be proactive with our planning.

If diversification of concentrated positions is part of your strategy, this could be an ideal time to do it.

WHENEVER YOU'RE READY, THERE ARE 3 WAYS I CAN HELP YOU:

1. Want one on one help? Schedule a 25 minute “Are We A Fit?” meeting

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3. Connect with me on LinkedIn, where I post every weekday (unless I’m on vacation). https://www.linkedin.com/in/marshalljoe/