Anyone who invests hopes for that “10-bagger” stock. That is a term coined by investing legend Peter Lynch for a stock that has climbed to 10 times the value paid for it. They’re rare, but not impossible to find.

Sometimes, though, you find yourself with a stock that is not just up ten-fold, but is a 20- or 30-bagger. That’s the position a Redditor on the r/fatFIRE subreddit finds himself in.

He bought Tesla (NASDAQ:TSLA) stock back in 2016 and has watched the stock grow to 20 to 30 times his purchase price. Over the last eight years, TSLA stock has gained more than 2,100%, though in 2021 it had been much higher.

The Redditor’s problem is TSLA stock now assumes a disproportionate 35% of his total $10 million net worth. He wants to diversify his holdings so his net worth is not so closely tied to just one asset, but wants to minimize the tax bill he has to pay. One problem is the stock is held in a regular brokerage account so he would have to pay long-term capital gains as well as a 10% tax to the state of California. The Redditor wants to know how he can minimize his tax bill.

24/7 Wall St. Insights:

• Buying a stock that goes way up in value is the goal of every investor, but it is not optimal to have too much of your net worth tied up in a single stock.
• If you sold your position to diversify your holdings you will incur a large tax bill for the capital gains realized as well as any taxes your state might impose.
• Fortunately there are a number of strategies investors can use to minimize or delay the taxes that will come due.
• It’s always important to discuss with a financial planner and tax professional any strategy you are considering before taking it.

It’s a nice problem to have, though understandable that he wants to keep as much of the gains he’s earned and not hand it over to the government. While I’m not a financial planner or tax profession, so these are just my opinions, there are a couple of steps he could take to lessen how much the Tax Man takes

1. Hold for the long-term

The easiest way to avoid the taxes is to not sell. Waiting until you retire and are in a potentially lower tax bracket can help offset some of the gains. Of course, in the Redditor’s situation, he has a very fat net worth and he wants to minimize the risk of having so much of it tied to the stock. Continuing to hold is not a viable option.

2. Tax-loss harvesting 

If the Redditor has other investments in his portfolio that he is showing losses, he could sell those stocks along with some of his Tesla holdings to offset its gains.

For example, selling $10,000 worth of TSLA and $10,000 worth of a losing stock would negate the capital gains tax. Similarly, he could sell $10,000 worth of TSLA and $15,000 of the loser, use a portion of the difference to offset the gains and then carry forward the remaining losses for subsequent years.

3. Buy an exchange fund

Not to be confused with exchange-traded funds (ETFs), which are mutual fund-like securities, exchange funds are purpose-built for situations like the one the Redditor finds himself in.

An exchange fund pools the holdings of investors with concentrated positions in different stocks and allows the investor to exchange them for units in the fund, which immediately diversifies their holdings and defers any gains to the future.

An example would be the Redditor owning a large amount of Tesla, another investor owning a similar stake in Nvidia (NASDAQ:NVDA), and a third owning lots of Microsoft (NASDAQ:MSFT) stock. Their individual holdings are gathered into an exchange fund and the investor buys shares, or units, of the fund. He now owns three different stocks and avoids the payment of taxes for any gains from the fund to the future. 

Of course, the exchange fund doesn’t hold just three stocks, but rather a large number of companies. And because the investor is swapping the stock for the fund, no actual sale occurs.

4. Move

Consider moving to a low-tax or no-tax state if possible to avoid the taxes a locality imposes.

5. Consult with professionals

Seek out the advice of financial planners and tax professionals, because these are somewhat complex issues and a lot of money is at stake so you want to receive competent advice on any action you might take.

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