Investing in the stock market can be a savvy financial power move, growing your initial investment beyond your wildest dreams. Even if you have more modest aspirations to secure your financial future, there are times when you may need to consider your assortment of holdings if the content of your portfolio loses its diversity.
If you find that you are too concentrated on certain stocks that seemed like a wise investment at first, here are some tax-efficient ways to sell them so you can reinvest in more diverse assets.
1. Leverage a Charitable Vehicle
Donating to charity is deeply meaningful to most people, especially if you select an organization that is near and dear to you and your loved ones. One way to offload some of your stock positions is simply to gift them through charitable remainder trusts or donor-advised funds, both of which can make you feel good about your decision to sell.
When you set up one of these trusts or funds, you no longer have to sell the stock yourself which could incur capital gains taxes. Instead, you place them inside the protected fund and the IRS allows you to sell them tax-free.
This means that your gift will go even further for the charity of your choosing because they will not be required to pay taxes on the profit from the initial purchase price.
Better yet, there is something in it for you beyond that warm and fuzzy feeling of giving to charity. You also benefit from a charitable deduction when you lighten your investment portfolio. If you will owe money to the IRS at the end of the tax year, this can be a savvy move that limits out-of-pocket spending as well.
2. Gift to Family Members
While leveraging charitable vehicles is admirable, some investors would prefer to transfer their stocks to people they know and care about personally. Friends, family members, and loved ones may be able to benefit from your generosity—and they may profit more than you would from the exact same sale.
How does it work?
You can transfer appreciated stocks to family members who remain in lower tax brackets. When they decide to sell the appreciated stock, they will still net some profit after capital gains taxes take their cut. After all, their lower tax bracket means they may incur lower capital gains tax as well.
Of course, the IRS does have a rule regarding how much you can give to another person without tax consequences. In 2025, the annual gift tax exclusion is $19,000 per person.
3. Covered Calls
If neither of the above options suits you, then covered calls are another solution, though they can be more complex. You sell your call options against all or just a portion of a position. In the end, you will be required to sell those stocks at an agreed-upon price by an expiration date. Most situations will entail selling higher than the current stock price.
The benefit of covered calls is that there are no taxes for the cash that changes hands while you retain ownership of the position. You will not have to pay short-term capital gains until the person who will be the purchaser decides to exercise the right to purchase.
Covered calls are not without financial risk, though. Consider the implications if your stocks reach a higher price than the strike price you set and are obligated to sell at. Those shares will still be sold and may not pay out based on that higher price.
On the other hand, the stock price may tumble during a covered call option period. If so, you will be the one holding the bag for the full loss minus the credit from the call sale.
4. Tax-Loss Harvesting
Sometimes, you have to lose money to make money. Tax-loss harvesting is another complex way to minimize the amount you will pay to the IRS while diversifying your holdings. At its most basic terms, you will sell some positions at a loss to offset the capital gains taxes on more profitable stock sales.
Why does it work out better to sell these holdings at a loss?
In part, it is due to the nature of capital gains taxes. Short-term capital gains are taxed at higher rates than long-term capital gains. If you want to sell a position that you held relatively quickly due to impressive fluctuations in the market, then you offset it with sales of long-term holdings.
Most of the time, this is a year-end strategy that offsets annual gains from a successful year. It is a way to balance out what you will owe on a different security, diversifying your holdings at the same time as you offset tax liabilities.
Consult with Magellan for Savvy Tax Moves
Not sure which strategy will give you the best results for your liabilities at the end of the year? At Magellan, we provide comprehensive estate, financial, legal, and tax planning services with more attention paid to charitable remainder trusts.
We also offer ongoing trust management at more affordable rates than our competitors. Get the help you need to balance your portfolio today by reaching out to our experienced team. We are here to advise you on the best path for you, your loved ones, and the causes you want to support! Contact us today to schedule a consultation.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.