Strategic Considerations for Concentrated and Low-Basis Assets
Prepared by Jake DuBois, Director of Investments
3Chopt Investment Partners
Executive Summary
For many successful investors, wealth creation often results in a different challenge: managing concentrated positions with substantial embedded capital gains. Whether the asset is a public stock position accumulated over decades, a closely held business, investment real estate, or private equity interests, the decision to diversify is frequently complicated by the tax consequences associated with selling.
In these situations, taxes become a meaningful portfolio consideration. A direct sale may improve diversification and reduce risk, but it can also trigger a significant tax liability that permanently reduces investable capital. Conversely, maintaining a concentrated position may defer taxes but expose the investor to unnecessary portfolio risk.
The objective is not simply to minimize taxes. Rather, it is to maximize after-tax wealth while balancing diversification, liquidity needs, risk management, estate planning goals, and investment flexibility.
Today, investors have access to a growing toolkit of tax-aware strategies that can help address these challenges. While no single solution is appropriate for every situation, thoughtful planning can often improve outcomes substantially.
Understanding the Challenge
Highly appreciated assets are common among affluent investors and entrepreneurs. Examples include:
- Concentrated public stock positions
- Founders’ shares in private businesses
- Private equity and venture capital investments
- Investment real estate
- Legacy portfolios with substantial unrealized gains
While each asset class presents unique planning considerations, investors generally share similar objectives:
Common Investor Goals
Diversification Reduce reliance on a single company, sector, or asset class.
Risk Management Protect accumulated wealth from adverse market or business-specific developments.
Liquidity Generate cash for spending needs, estate planning, philanthropy, or new investment opportunities.
Tax Efficiency Avoid unnecessary realization of gains and improve after-tax outcomes.
Unfortunately, these objectives often conflict with one another. Increasing liquidity may require realizing gains. Diversification may create tax consequences. Hedging may reduce risk but introduce complexity and cost.
As a result, successful planning typically requires evaluating all dimensions simultaneously rather than focusing exclusively on taxes.
The Strategic Toolkit
The available solutions generally fall into three categories: diversification strategies, monetization and hedging strategies, and tax-loss generation strategies.
Diversification Strategies
Certain structures allow investors to reduce concentration without immediately triggering a taxable event.
Examples include exchange funds, tax-efficient diversification vehicles, and certain real estate exchange structures. These approaches generally seek to exchange concentrated exposure for a diversified portfolio while deferring the recognition of gains.
Potential advantages include:
- Immediate diversification
- Continued market participation
- Tax deferral
- Potential estate planning benefits
Potential tradeoffs include:
- Lock-up periods
- Limited liquidity
- K-1 reporting
- Eligibility restrictions
These strategies are often most appropriate for investors with long investment horizons who prioritize diversification over immediate liquidity.
Hedging and Monetization Strategies
Some investors wish to maintain ownership while reducing downside risk or accessing liquidity.
Options-based hedging strategies can establish a range of outcomes for a concentrated position while preserving ownership. More advanced structures may allow investors to borrow against appreciated assets and redeploy capital elsewhere without triggering an immediate taxable event.
Potential uses include:
- Funding lifestyle needs
- Supporting family planning strategies
- Investing in new opportunities
- Reducing portfolio concentration risk
While attractive in certain circumstances, these strategies can involve:
- Counterparty considerations
- Ongoing management requirements
- Financing costs
- Complexity surrounding tax treatment
Proper implementation and coordination with legal and tax advisors is critical.
Tax-Loss Generation Strategies
One of the most significant developments in recent years has been the evolution of tax-loss generation strategies.
Traditional direct indexing has long been used to harvest losses across diversified portfolios. More sophisticated approaches now incorporate long/short structures designed to create additional opportunities for tax-loss harvesting while maintaining targeted market exposure.
These strategies may be particularly useful for:
- Investors with recurring realized gains
- Business owners anticipating a future sale
- Individuals exercising stock options
- Families realizing gains from real estate or private investments
The objective is straightforward: generate tax assets that can potentially offset future capital gains while maintaining an appropriate investment allocation.
As with any investment strategy, however, investors must understand the associated risks, including leverage, tracking error, and implementation complexity.
If you are interested in examples of diversification strategies, monetization and hedging strategies, and tax-loss generation strategies, please reference our Tax Efficiency presentation.
Evaluating the Right Strategy
Although the available solutions can be powerful, determining the optimal approach requires a comprehensive review of an investor’s situation.
We generally begin by addressing four key questions:
1. Is the Strategy Appropriate and Available?
Certain strategies have minimum investment thresholds, asset eligibility requirements, or accreditation standards.
2. What Liquidity Is Required?
Some solutions provide daily liquidity, while others require commitments of five to ten years or longer.
3. What Risks Are Being Introduced?
Investors should fully understand leverage, counterparty exposure, operational complexity, and market risks before proceeding.
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4. Does the Strategy Align With Broader Planning Goals?
The most tax-efficient strategy is not always the most effective solution. Estate planning objectives, income needs, charitable intentions, and family circumstances all play important roles in determining the best path forward.
Our Perspective
Tax planning and investment management are increasingly interconnected. As portfolios grow and gains accumulate, taxes become one of the largest determinants of long-term wealth creation and preservation.
The good news is that investors today have more tools than ever before to address concentrated positions, diversify portfolios, access liquidity, and improve after-tax outcomes. The challenge lies in selecting the appropriate strategy for a specific set of circumstances.
At 3Chopt Investment Partners, we view tax efficiency as an important component of portfolio construction rather than a standalone exercise. We evaluate each opportunity within the broader context of an investor’s objectives, risk tolerance, liquidity requirements, and long-term financial plan.
No single solution is universally superior. The best outcome is typically achieved through thoughtful planning, careful implementation, and ongoing coordination among investment, legal, and tax professionals.
For investors facing significant embedded gains, the conversation should begin long before a sale occurs. In many cases, the most effective opportunities are available only when planning starts years in advance.
As always, we encourage investors to consult with their legal and tax advisors before implementing any strategy discussed herein.
Important Disclosure
The views expressed are those of 3Chopt Investment Partners as of June 9, 2026 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. This should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations. Third-party information in this report has been obtained from sources believed to be accurate; however, 3Chopt makes no guarantee as to the accuracy or completeness of the information.
3Chopt is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about 3Chopt’s investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, which is available upon request.