Why people look for alternatives to selling
Holders of concentrated, low-basis stock often want two things at once: less exposure to one company and fewer capital gains taxes. Some also want liquidity for a purchase, a business, or a tax bill without giving up the shares. And some plan to hold until death, when heirs may receive a step-up in basis.
The strategies below try to separate three things that a sale delivers together: cash, reduced risk, and a taxable event. None of them is free, and for many executives the company's policies rule several of them out.
1. Securities-based lending
A securities-based line of credit lets you borrow against an investment portfolio without selling it. Proceeds generally cannot be used to buy securities, but can fund other needs. Interest accrues on what you borrow.
Lenders typically lend a lower percentage against a single stock than against a diversified portfolio, and may not lend against restricted or affiliate-held shares at all. If the shares fall, the lender can demand more collateral or sell the shares, at the worst time and possibly creating the tax bill you were trying to avoid. Borrowing against a concentrated position adds leverage to the risk you already have.
2. Collars
A collar pairs a purchased put option, which sets a floor on the position's value, with a sold call option, which caps its upside. The call premium can partly or fully pay for the put. For the term of the collar, losses below the floor and gains above the cap are given up.
A collared position can also support borrowing at a higher loan-to-value than unhedged stock, which turns a hedge into a source of liquidity. Collars involve transaction costs, can have tax consequences under the straddle rules, and must be structured so they are not treated as a sale (see the constructive sale rule below). Our guide to diversifying a concentrated stock position covers collars as part of a broader diversification plan.
3. Prepaid variable forwards
In a prepaid variable forward, you agree to deliver a variable number of shares, or their cash value, to a counterparty at a future date, typically a few years out. In exchange, you receive a large portion of the shares' current value in cash up front. The number of shares delivered depends on the stock price at maturity, which builds in a floor and a cap similar to a collar.
When structured properly, the sale for tax purposes generally happens at settlement rather than when you receive the cash. The IRS has challenged some arrangements, including ones where the shares were also lent to the counterparty, and treated them as current sales. These are complex, typically available only for large positions, and should involve tax counsel.
4. Exchange funds
An exchange fund pools concentrated positions from many investors into a diversified portfolio, without an immediate taxable sale. It reduces single-stock risk rather than providing cash. Exchange funds typically require a holding period of several years, are limited to qualified investors, and charge ongoing fees.
The constructive sale rule
Under Section 1259 of the tax code, a transaction that eliminates substantially all of your risk of loss and opportunity for gain on an appreciated position can be treated as a sale, triggering the tax you were trying to defer. Shorting the same stock, entering into an offsetting forward, or a hedge with a very narrow band can all qualify.
There is no bright-line rule for how wide a collar or forward must be. That is why these strategies are structured with tax counsel, and why a hedge that looks efficient on paper can backfire.
The insider problem
For directors and officers, company policy often decides the question before tax does:
- Anti-hedging policies. Public companies must disclose whether they permit employees and directors to hedge company stock, and many prohibit it for officers and directors.
- Anti-pledging policies. Many companies prohibit or limit pledging shares as loan collateral, which can rule out securities-based lending on company stock.
- Short sales. Section 16 officers and directors are prohibited from short-selling their company's stock.
- Reporting and timing. Insiders' derivative transactions are generally reported on Form 4, and trades must respect trading windows and, for affiliates, Rule 144.
Read your company's insider trading policy first. If hedging and pledging are prohibited, the practical tools narrow to planned sales under a 10b5-1 plan, charitable strategies, and exchange funds.
Choosing among them
Hypothetical example: Meet "Rachel," a retired executive with a large, low-basis position in her former employer, no longer subject to its trading restrictions. She wants cash for a home purchase and less exposure, and she would prefer to defer most of the tax. Securities-based lending could fund the purchase quickly but leaves her fully exposed. A collar could limit her downside for a few years and support a larger loan. A planned sale over several tax years would reduce risk permanently but realize the gains. Each option trades one goal for another, and the choice depends on which goal matters most to her.
Questions to answer first: Are you permitted to hedge or pledge? How long do you expect to hold? What would a sale cost in tax, now and spread over several years? What happens to each strategy if the stock falls by half? A multi-year tax projection makes the comparison concrete.
Common mistakes
- Treating a loan as diversification. Borrowing against a position keeps all of its risk.
- Ignoring the company's hedging and pledging policy.
- Structuring a hedge so tight it becomes a constructive sale.
- Underestimating costs: interest, option premiums, fees, and the upside given up.
- Using complex structures for a position where a staged sale would do.
Important: Skyview Financial Group does not provide legal advice or prepare tax returns. Hedging and monetization strategies involve significant risks, costs, and eligibility requirements, and are not appropriate for everyone. This post is general education, not a recommendation of any strategy or security. Structures should be reviewed with tax and legal counsel.
Related: our equity compensation planning and our investment management.
Disclosure: Skyview Financial Group, LLC is an SEC-registered investment adviser (CRD #310581). This content is educational only and is not individualized tax, legal, or investment advice. Skyview Financial Group does not prepare or file tax returns. Figures and rules cited are current as of October 2026 and subject to change; please consult your CPA and, where applicable, legal counsel. Examples are hypothetical and do not reflect any specific client.