Jackpot Stock Scare Story

WHAT TO DO IF MUCH OF YOUR WEALTH IS IN A SINGLE ASSET AND YOU DON'T WANT TO BE CLOBBERED BY CAPITAL GAINS TAXES.

- by WILLIAM BALDWIN

You're sitting on an immense unrealized gain on a volatile stock, and it's making you nervous. Should you sell and pay a lot of tax? Hold and run the risk of losing it all? Are there other options?

A nice problem to have:

This affliction of the wealthy is one Andrew Whitehair is in business to cure. He's a 44-year-old CPA at Baker Tilly, a firm that assists businesses and prosperous individuals with tax and accounting challenges. He lives near Cleveland, a consequence of being the dutiful husband of a high-powered doctor, but has a national clientele.

We've had a bull market, especially in tech startups. The countryside is now littered with undiversified millionaires. In what follows, Whitehair looks at seven exit ramps for people with concentrated long-term positions in taxable accounts. They are presented in increasing order of cost, complexity and uncertainty.

By temperament, Whitehair leans toward simple solutions.

1. SELL

The first option Whitehair considers: “Bite the bullet.” Give up maybe a third of your money to tax collectors. What's left can go into a diversified index fund or a blend of stocks and bonds.

ADVANTAGE: simplicity. DISADVANTAGE: missing out on various ways to avoid capital gains tax, such as the step-up at death.

2. EXIT SLOWLY

Unload a $1 million position in equal doses over ten years and you've got a shot at paying tax at the 15% federal rate rather than the 20% rate for rich people. You might also duck the 3.8% investment surtax, imposed on incomes above $250,000 on a joint return.

DISADVANTAGE: risk. Going into the second year, 90% of your money is still exposed to a crash in the stock.

3. DONATE