Investing in the stock market consistently over time is one of the best ways to build your wealth. For approximately the last hundred years, investing in the top 500 U.S. companies (a.k.a. the S&P 500) has returned roughly 10% annually. Once your investments have risen in value, they are considered appreciated stock.

Given EquityFTW’s focus on equity compensation, we often see people who have large holdings of appreciated stock. One successful IPO can bring with it both the blessing (and potential tax curse!) of a highly appreciated investment.

The purpose of this article is to provide you with ways to put your appreciated stock to good use.

First, let’s discuss general concepts for managing an appreciated stock position. Then, we’ll consider a few of our preferred ways to use appreciated stock.

Thoughts on Managing Appreciated Stock

As it is with all things in personal finance, how you manage your appreciated stock should be based on your preferences and goals. What are you trying to accomplish with your wealth?

If you’ve accumulated a large sum of appreciated stock, you have a unique opportunity to give to others, support a charity, and/or solidify your investment portfolio for the future. It’s important to take time to reflect on what’s important to you. It may also be worth consulting with experts for their input. 

Here are some questions to guide you in this process:

• How much of my appreciated stock do I need to sell to solidify my financial future?

• How much do I need to support my lifestyle?

• Do I want to give a portion of my wealth to people I care about?

• Is there anyone in my family to whom I feel indebted that I would like to give back to?

• Do I want to use my appreciated stock to help my children fund future life events/goals?

• Do I want to support a specific cause/charity?

• Have I wanted to contribute to charities but haven’t in the past?

This is not an exhaustive list of questions. The questions are meant to help you think about how to use your appreciated stock in a way that matches what you truly value.

We’ve all heard that giving makes you happier. Giving can mean giving time, money, skills, blood, etc. The important thing about giving is that it can help you feel a connection to others around you and feel a sense of purpose. That purpose is often what’s missing from people blazing the FIRE path.

Alright, onto the uses of appreciated stock. Note that these aren’t in any particular order.

#1 - Gift Appreciated Stock Outright to People

The first way to use appreciated stock is to make gifts of your appreciated stock directly to people. Depending on how much you’re wanting to gift, who the recipient is, and what the appreciated stock is, there are some important things you’ll want to consider:

• No Tax Deduction For the Giver - Gifting stock to another person doesn’t qualify for a tax deduction. For your gift to count as a potential tax deduction, you’ll need to gift the appreciated stock to a qualified charity.

• Cost Basis Carries Over - When gifting your shares to another person, the recipient will keep your cost basis (what you paid for the shares). This means that if you bought a stock for $10 and it’s now worth $200, the recipient is considered to have paid $10 for the stock.

• Recipient Has Complete Control - If you give your appreciated stock outright to someone, the recipient can use the gift however they want. Depending on the size of the gift, you may want to think about how the recipient will use it. If you don’t trust that the recipient will use the gift wisely, you may want to create an irrevocable trust that has requirements for the use of those funds. (We’ll discuss this in greater detail later.)

• Recipient Can Sell at Their Tax Rates - Another benefit of gifting appreciated stock outright is that if the recipient is in a lower tax bracket, they’ll be able to sell the shares and likely pay fewer taxes than you would.

• The Gift May Come Back to You - This one is a little grim, but if you make a gift of appreciated stock to your parents and they continue to hold it until they die, you may inherit the stock right back. Under current tax laws, the cost basis would be adjusted upward to the value at the date of death, and then the stock is passed down to you with no embedded gain. 

• $18k Annual Gift Exclusion - When making any sort of gift to another person who’s not your spouse, the IRS limits gifts to $18k of value per person, per year. You can go over this amount, but you’ll need to file a gift tax return and it will reduce your lifetime gift tax exemption by whatever amount exceeds the $18k per person, per year.

#2 - Gift Appreciated Stock to People Through a Trust

Gifting appreciated stock to people through a trust is very similar to what is described in the section above. The biggest difference is that when you give appreciated stock through a trust, the person making the gift has a say in how the appreciated stock is ultimately used.

There are many different trust options. At some point, you’ll want to establish a living/revocable trust that can hold all your assets, but the type of trust that you’ll likely want to establish as a means to gift appreciated stock to someone is an Irrevocable Trust. It’s considered irrevocable because whatever assets go into the trust must abide by the rules of the trust. 

We typically see irrevocable trusts once someone’s wealth is projected to create an estate tax issue. They can be great tools if you want to give appreciated stock to your children to get the asset out of your estate, but they can also be a great way to give shares to children who aren’t quite yet to an age where they can be trusted with a sizable investment. 

Within the trust document, you can spell out exactly what the funds can and can’t be used for. You can decide what may be purchased at future ages. You can even arrange for the trust to dissolve once a child reaches a certain age.

Here are some examples of things you can spell out in an irrevocable trust:

• Funds from the trust can only be used for college expenses.

• At certain life events (marriage, children, graduation, age 25, etc.) the recipient can withdraw a specified dollar amount from the trust.

• You can spell out how much can be withdrawn from the trust annually.

• You can instruct that only income/interest produced by the investments in the trust is available for withdrawal with the rest remaining in the trust until some future event.

You can get as creative as you’d like with this type of trust. Ultimately, it will be the responsibility of whomever you name as Trustee to ensure that funds are used according to the specifications you spell out within the trust.

It’s also important to note that to create any sort of trust, the document will need to be drafted by an estate attorney. During your initial meeting with the attorney, you’ll be able to decide which form of trust will be best to achieve the goals you’re trying to accomplish. 

#3 - Donate Appreciated Stock to Charity

Depending on how charitably inclined you are, you’ll either love this idea or hate it. The government provides a nice incentive to donate appreciated stock and if you make donations to charity often, you may want to stop making cash contributions.

The reason we say this is because when you donate appreciated stock, you receive a deduction for the full value of your gift, and the receiving charity can sell the stock without having to pay any taxes.

This is important to know because if you donate appreciated stock to charity, you never have to realize the capital gain, but you’ll be able to potentially claim a deduction for the donation.

Here’s a comparison of what it looks like to donate cash after selling appreciated stock and what it looks like if you donate the appreciated stock outright.

As you can see, if you sell your appreciated stock first, then contribute to charity, less money goes to charity and your tax deduction will be less. However, if you donate the appreciated stock directly to the charity, you’ll be able to give more to charity and you’ll receive a larger tax deduction.

Most charities should be able to accept appreciated stock as a form of donation, it just requires a little extra work. If a charity doesn’t accept appreciated stock, a Donor Advised Fund (DAF) could be a good option. We’ve written about DAFs and other charitable vehicles in our article about How to Avoid Taxes on RSUs, we’ve also covered DAFs in more detail in our Using a DAF to Pay Tithing article. (Even if the tithing part has no applicability, the DAF part is great.)

#4 Sell Appreciated Stock Over Multiple Years

If the embedded gains within your appreciated stock position are so great that selling will bump you into the highest tax brackets, it may make sense to sell over multiple years, taking advantage of lower tax brackets. 

At the time of writing this article, it’s summer of 2024. Let’s say, for example, that you want to sell a large portion of your concentrated stock. You could sell a large portion in 2024 and then another large portion at the beginning of 2025 to dip into a new tax year.

One thing to be cautious about is that if you have one single company stock, there will likely be greater volatility in your holding than if you diversified. For this reason, it’s typically best to sell relatively quickly rather than sell over 10-15 years. Given all the potential tax changes, you’ll also want to pay attention to how and if you’ll be affected by changes to long-term capital gains rates.

Appreciated stock can be really beneficial if you retire early and it provides a large bucket of non-retirement assets you can pull from.

#5 Put Your Appreciated Stock in an Exchange Fund/Swap Fund

If your appreciated stock is large enough, some banks/brokerages will help you establish what’s called an exchange fund or a swap fund. 

These funds allow you to contribute your appreciated stock holding and then the brokerage will swap your holding for a large collection of investments. There’s a new fintech company, Cache, that’s aiming to make this exchange fund solution accessible to more people. They’ve put together the best write-up on exchange funds we’ve read.

The big benefit is that you can do this without having to realize any capital gains.

The downside is that they are costly, illiquid, and it might just be better to pay the taxes.

Final Thoughts on Using Appreciated Stock

Properly managing highly appreciated stock can have a huge impact on your life and potentially future generations. $100k of appreciated stock vs $10m of appreciated stock comes with different strategies and different effects, however, no matter the size of your appreciated stock, you’ll want to put thought into your decision making.

We’re happy to be a resource to you and are happy to be a sounding board as you try to figure out what’s best.