Five moves to keep more of a large, low-basis concentrated position when it finally turns to cash: how to diversify, finance, and protect it without handing a quarter of your gain to the IRS.
A concentrated, low-basis position from a liquidity event, an IPO, a founder exit, an acquisition, or simply years in one stock, leaves most people with a bad menu: hold it and stay fully exposed to one stock, or sell it and realize the gain.
At the top 2026 federal rate of 20 percent long-term capital gains plus the 3.8 percent net investment income tax (NIIT), that is 23.8 percent before any state tax (IRS, 2026). The point of this playbook is the third path between those two.
There is no single move. There are five, and they reinforce each other. A Section 351 exchange (26 U.S. Code Section 351) diversifies the bulk of the position with no tax today. Direct indexing rebuilds broad-market exposure as a tax engine. Systematic loss harvesting banks losses to offset gains. Box spread financing raises cash near Treasury rates without selling. A synthetic variable prepaid forward protects and monetizes whatever concentrated stake remains.
Most of these strategies defer tax rather than erase it. The deferred gain rides inside your new shares, and if you hold until death, your heirs may receive a step-up in basis that resets cost basis to fair market value and can wipe out the embedded gain entirely under current law.
Timing matters more than people expect. A 351 contribution generally has to happen while a sponsor is seeding a new exchange-traded fund (ETF), and you usually cannot transfer shares until any lockup or transfer restriction lifts. Both argue for planning before the shares are liquid, not after.
Every structure here is built from instruments you control and can be priced against the market, not bought as an opaque, marked-up bank product. Most advisors have never built them. We build them regularly.
These are tools for a specific profile: a holder of a large taxable position with meaningful embedded gain who wants to diversify, finance, or protect without a forced sale. They are wrong for someone who simply wants out of the stock, who holds only in tax-advantaged accounts, or who lacks the liquid collateral the financing legs require.
The five moves are not a menu you pick one item from. They are an ordered system, and knowing which move answers which need is most of the work. Use the table below as a quick reference: start from the need on the left, and the move on the right is where the default order starts.
| When you need to… | Reach for |
|---|---|
| Diversify the bulk of the position without realizing the gain | Section 351 exchange |
| Rebuild broad-market exposure that also harvests losses | Direct indexing |
| Build a large, reliable inventory of losses ahead of a gain | Long-short loss harvesting |
| Raise cash without selling appreciated positions | Box spread financing |
| Protect and monetize a stake you still want to hold | Synthetic variable prepaid forward |
You hold a large, low-basis position and want to diversify, but selling to rebalance realizes the entire embedded gain and hands a fifth or more of it to the IRS before you can reinvest a dollar.
A Section 351 exchange, named for Section 351 of the Internal Revenue Code (26 U.S. Code Section 351), lets a group of investors contribute securities into a newly launched exchange-traded fund (ETF, a pooled, listed fund) in exchange for shares of that fund, with no tax due at the time of the transfer. Your cost basis (what you originally paid) and your holding period carry over. The embedded gain is not realized. It is deferred inside your new ETF shares until you sell them.
You go from an old, tax-locked single position to a clean, diversified, liquid fund without writing a check to the IRS to get there. You pay the tax only when you sell the ETF shares, on your schedule rather than the market's, and if you hold until death the step-up in basis may erase the deferred gain entirely under current law. This is a deferral, not an erasure, and it differs from a traditional exchange fund, which is a partnership that typically locks money up for about seven years and is limited to qualified purchasers. A 351 conversion gives you liquid ETF shares with no seven-year lock.
Consider an investor with $3,000,000 spread across long-held names, a $1,000,000 cost basis, and a $2,000,000 embedded long-term gain. Selling to rebalance realizes that $2,000,000 gain. At the top 2026 federal rate of 20 percent plus the 3.8 percent NIIT, that is $476,000 of federal tax, and adding California at its top 13.3 percent rate brings the bill to roughly $742,000 due this year. Through a 351 exchange, the same investor contributes the portfolio into a launching ETF, owes nothing this year, and carries the $2,000,000 gain forward inside the new diversified shares. Same diversification goal, tax deferred rather than paid.
After you diversify, you still want broad-market exposure, but a plain index fund gives you the return and nothing else. When one stock inside the index falls, that loss is trapped inside the fund and you cannot use it against your other gains, and the S&P 500 itself is far more concentrated than it looks.
Direct indexing means owning the individual securities that make up an index, all of them or a representative sample, rather than a fund that holds them for you. The market exposure is essentially identical to an S&P 500 ETF. The tax treatment is completely different. Because you own the individual stocks, you can harvest losses at the security level: when one name drops while the broader index is flat, you sell it, immediately buy a similar stock to keep your exposure, and bank the loss as a tax asset.
Individual stocks move independently, so even in a rising market some names are down, which means harvesting opportunities appear continuously. Those banked losses can be deployed against gains anywhere in your portfolio: a business exit, a real estate sale, an RSU (restricted stock unit) vest, or reducing the concentrated position itself. This also addresses a hidden problem with the index: market-cap weighting has pushed the top 10 S&P 500 companies from 19 percent of the index in 1990 to more than 40 percent today, with those same 10 names capturing about 34 percent of all S&P 500 profits (Apollo Chief Economist). Direct indexing lets you keep the foundation while building around it intentionally.
One holding inside a directly indexed S&P 500 portfolio falls 15 percent while the broader index is flat. Instead of letting that loss sit trapped (as it would inside an ETF), you sell the position, immediately buy a similar stock to keep your exposure, and bank the realized loss. The index barely moved, but your loss bank just grew. Harvested losses offset realized capital gains, plus up to $3,000 of ordinary income per year, and anything unused carries forward indefinitely (IRS). Run systematically over a 20- to 30-year horizon, the after-tax difference on a seven-figure portfolio can run into the hundreds of thousands of dollars, not from better stock picks but from being deliberate about taxes.
A directly indexed portfolio in a calm, rising market only throws off so many losses, yet you have a very large embedded gain to offset. You need a bigger, more reliable inventory of harvestable losses, and you need to capture them without tripping the wash sale rule.
Tax-loss harvesting means deliberately selling a position that has fallen below its cost basis, locking in the loss on paper, and immediately reinvesting in something similar so your market exposure stays essentially the same. You have not changed your strategy or permanently exited; you have converted a paper loss into a tax asset, what we call a loss bank. The one rule to respect is the IRS wash sale rule: if you buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed, so you buy something similar but not identical.
The goal is to systematically build an inventory of losses that sits in the portfolio until a taxable event arrives (a business sale, a real estate gain, equity compensation, or reducing the concentrated stake), at which point the losses are already there to offset it. In this framework volatility is not a problem to manage, it is the raw material: the more the market moves, the more harvest opportunities appear and the larger the loss bank grows. Paired with box spread financing, the combination compounds, because the harvested losses offset gains while the box spread loan can generate deductible interest, with that interest treated as a capital loss under IRS Section 1256 (60 percent long-term, 40 percent short-term).
An investor expects a large gain event ahead, for example reducing the concentrated stake or a business sale. By harvesting losses systematically through the years beforehand, the portfolio builds a loss bank that offsets realized gains dollar-for-dollar when the event lands, sheltering gains that would otherwise be taxed at up to 23.8 percent federal (IRS, 2026) before state tax. Unused losses also offset up to $3,000 of ordinary income per year and carry forward indefinitely (IRS), and on a seven-figure portfolio managed this way over decades the cumulative after-tax difference can reach into the hundreds of thousands of dollars. The earlier the harvesting starts, the larger the offset when the event arrives.
You need liquidity, for a home, a tax bill, a private deal, or to reinvest, but you do not want to sell appreciated positions and trigger the gain. The usual answer is a bank line of credit at whatever rate the bank feels like charging, with an application, a credit check, and terms it can change on you.
A box spread is a package of S&P 500 index options (SPX, or its one-tenth-size sibling XSP) that, combined, behaves like a fixed-rate loan. It is a four-leg structure (a bull call spread plus a bear put spread at the same strikes, same index, same expiration) deliberately built so the payoff at expiration is fixed no matter where the market goes. Because the payoff is known, you can calculate the implied interest rate before you trade: the difference between the cash you receive today and the fixed amount you owe at expiration. That rate is set by the options market in real time, and it has historically priced close to Treasury yields, well below most margin accounts, HELOCs, or bank loans.
You sell the box spread, cash lands in your account, your portfolio stays fully invested with no positions sold and no gain triggered, and at expiration you settle the fixed amount or roll it forward. The strategy works only with European-style index options (SPX or XSP), where early exercise is impossible, which is what guarantees the fixed payoff. The interest may be deductible as investment interest expense, and box spread interest is treated as a capital loss under IRS Section 1256 (60 percent long-term, 40 percent short-term). Because you never sell, appreciated positions keep compounding and the step-up in basis at death stays intact.
A $1,000,000 one-year box spread on XSP delivers cash up front at roughly 95 to 97 cents on the dollar, at an implied annualized rate near 4.25 percent based on XSP box spread market data (2026), with the three-year near 4.32 percent and the five-year near 4.38 percent. That tracks close to Treasury yields and sits well below typical margin, HELOC, or bank-loan rates. The portfolio stays fully invested, no appreciated position is sold, no capital gain is triggered, and the interest is treated as a capital loss under IRS Section 1256. Rates vary with market conditions and exclude fees.
After diversifying the bulk, you keep a concentrated stake you still believe in but cannot easily sell. You want downside protection and cash today without the taxable sale, and without the markup and lock-in of a packaged bank product.
A variable prepaid forward (VPF) is a contract in which you receive cash today in return for agreeing to deliver a variable number of shares at a future date, with a band of price protection built in. Wall Street has sold packaged VPFs to concentrated holders for decades, but the economics can be rebuilt transparently from listed instruments you control. First, the collar: with the stock at, say, 100, you buy a put option at 90 (a put gives you the right to sell at the strike, so it sets a floor below which your downside is capped) and you sell a call option at 110 (a call obligates you to sell at the strike if exercised, capping your upside above 110, and the premium you collect helps pay for the put). The long put and short call together bracket the position: protected below 90, capped above 110, free to move in between.
Second, the box spread provides the cash: a package of S&P 500 index options that behaves like a fixed-rate loan priced near Treasury yields. Layer the box spread on the collared position and you have rebuilt a VPF from parts you fully control. No shares are sold, so there is no realized gain and no check to the IRS at execution; the gain stays deferred and the step-up in basis at death is preserved. The one thing to plan around is the constructive sale rule under Section 1259 of the Internal Revenue Code: a hedge that strips out nearly all of your risk and reward can be treated as if you sold the stock, so the put and call strikes must be spaced widely enough to retain meaningful exposure. That spacing is a deliberate planning decision.
An investor holds $3,000,000 of a single appreciated stock with a $1,000,000 cost basis and a $2,000,000 embedded long-term gain. Selling to de-risk realizes that gain and costs $476,000 of federal tax this year at the top rate of 20 percent plus the 3.8 percent NIIT, before state tax, and surrenders the future upside. Through a synthetic VPF, the same investor instead collars the position (illustrative strikes: put at 90, call at 110) and raises cash with a box spread. No shares are sold, so there is no gain to report and no check to the IRS this year. The downside is floored, a defined slice of upside is retained, the borrowed cash is available to diversify or spend, and the gain stays deferred inside shares the investor still owns, with the potential step-up in basis at death intact.
Sequence the five moves rather than picking one. Plan before any lockup or transfer restriction lifts, because the best options expire with it. Each move makes the next more powerful.
Held to the end, the step-up in basis can reset cost basis at death and erase the deferred gain entirely under current law. The throughline is simple: stay invested, defer deliberately, and pay the tax on your schedule, not the market's.
Every structure here is built from instruments you control and priced against the market, not bought as an opaque bank product. If you are holding a large, low-basis position and want to map the right sequence for your situation, let's talk.
Start a conversation →This is informational only and not personalized tax, legal, or investment advice. Figures are illustrative and reflect top 2026 brackets; your situation will differ. Consult your own tax and legal advisors before acting.