The $800,000 Problem
You’ve got $800,000 sitting in one company’s stock. Maybe it’s four years of RSU vests you never sold. Maybe it’s ESPP shares you kept because selling felt like admitting the run was over. Either way, $200,000 of that is basis and $600,000 is unrealized gain, and every financial advisor who’s ever looked at your account has told you the same thing: concentration risk is the only investment risk you’re taking on for free. Nobody’s paying you extra return for owning one stock instead of a diversified index. You’re just exposed.
You have two real options: sell it and pay the tax, or put it into an exchange fund and defer the tax for seven years. For almost everyone reading this, selling wins. It’s cheaper, it’s simpler, and it gets you diversified today instead of in 2033. Exchange funds are a real tool, but they’re built for people with $2 million-plus concentrated positions and multi-million-dollar net worths who value immediate diversification enough to pay 1%+ a year for it and lock up their money for seven years. If that’s not your situation, keep reading, but expect to land on “just sell it.”
The Numbers, Set Up
Let’s set the scene with real numbers. You’re a single filer, your base taxable income from salary and everything else (before touching the stock) is $150,000 a year, and you’re sitting on $800,000 of a single stock with a $200,000 cost basis. That’s a $600,000 long-term capital gain waiting to be triggered.
Two 2026 tax facts matter here. First, the long-term capital gains brackets for a single filer: 0% up to $49,450 of taxable income, 15% up to $545,500, and 20% above that. Long-term gains stack on top of your ordinary income for bracket purposes, they don’t get their own separate ladder starting at zero. Second, the Net Investment Income Tax: an extra 3.8% on investment income once your modified adjusted gross income crosses $200,000 for a single filer ($250,000 married filing jointly). That threshold hasn’t moved since 2013 and isn’t indexed for inflation, so it catches more people every year as incomes rise.
Option One: Sell It All in One Year
If you sell the entire position in a single tax year, your $150,000 of ordinary income and $600,000 of gain both land on the same 1040. The gain stacks on top of the $150,000, which means:
- $395,500 of the gain (from $150,000 up to the $545,500 breakpoint) gets taxed at 15% federal: $59,325.
- The remaining $204,500 (from $545,500 to $750,000 total income) gets taxed at 20% federal: $40,900.
- Federal LTCG tax: $100,225.
Then add the NIIT. Your total MAGI is $750,000, which is $550,000 over the $200,000 threshold. NIIT applies to the smaller of your net investment income ($600,000) or the amount over the threshold ($550,000), so the smaller number wins: $550,000 × 3.8% = $20,900.
Total federal tax on the sale: $121,125. That’s an effective rate of just over 20% on the $600,000 gain, before state tax (California or New York filers, add another 9 to 13 points on top of this). You walk away with $678,875 to reinvest.
Option Two: Sell It on a Schedule
Now spread the same $600,000 gain over four years, $150,000 a year, using either a disciplined manual schedule or a 10b5-1 plan if you’re an insider who needs one. Each year your ordinary income stays $150,000 and you add $150,000 of gain, for $300,000 total.
That $150,000 of gain stacks from $150,000 to $300,000, entirely inside the 15% LTCG bracket (still well under the $545,500 breakpoint). Federal LTCG tax: $22,500 a year.
NIIT: MAGI is $300,000, which is $100,000 over the $200,000 threshold. Net investment income for the year is $150,000, so again the smaller number wins: $100,000 × 3.8% = $3,800 a year.
Tax per year: $26,300. Over four years: $105,200. Compare that to $121,125 for the lump sum, a savings of $15,925, roughly 13% less tax paid for spreading the exact same sale across four tax years instead of one. The mechanism is simple: spreading keeps more of each year’s gain under the 20% LTCG breakpoint and shrinks the dollar amount exposed to NIIT each year, instead of piling all of it on top of your income at once.
Pair this with tax-loss harvesting elsewhere in your portfolio (selling losing positions in a taxable brokerage to offset realized gains) and you can trim the bill further in whichever years the market cooperates. Reinvest each year’s proceeds into a diversified index fund immediately rather than waiting for the whole position to clear. You don’t need to hold cash between tranches; every dollar you free up should go straight into something diversified.
How many years should you spread the sale across? There’s a real tradeoff. Stretch it to eight or ten years and you shave the tax bill further, but you’re also carrying single-stock risk for a decade while you wait, and a bad quarter from the company can wipe out more value than the extra tax savings were ever worth. Compress it to a single year and you take the full $121,125 hit but you’re diversified immediately. Three to five years is usually the balance point: enough spread to keep most of each year’s gain under the 20% breakpoint and out of the heavier NIIT exposure, short enough that you’re not still holding a meaningful chunk of one company’s stock five years from now. Run your own numbers against your actual base income, since the exact split between the 15% and 20% brackets depends entirely on how much room you have before the $545,500 single-filer breakpoint (or $613,700 married filing jointly).
The Exchange Fund Alternative
An exchange fund works differently. You contribute your $800,000 of stock to a partnership alongside other investors who are each contributing their own concentrated positions. In return, you get units in the fund. Because this is treated as a contribution to a partnership under IRC Section 721 rather than a sale, no gain is recognized at the time you put the stock in. Your $200,000 cost basis carries over to your partnership interest.
For this to work, the fund can’t just be a basket of stocks, or the IRS treats it as a disguised sale. The fund has to hold a meaningful slice, commonly cited around 20% or more, of illiquid assets, usually real estate, to qualify as an operating partnership rather than an investment company. Most funds fund that real estate sleeve partly with leverage (borrowing against the portfolio) rather than selling contributed stock, since selling the stock would trigger the very gain everyone joined the fund to avoid.
You’re locked in for seven years. That period comes from IRC Section 704(c)(1)(B) and the related mixing-bowl rules: redeem early and you risk the IRS treating it as if you sold your original contributed stock, recognizing the very gain you were trying to defer. After seven years, you can redeem your units for a proportional, diversified slice of the fund’s holdings, and your original $200,000 basis carries through to those shares. You still owe capital gains tax when you eventually sell them. This is deferral, not forgiveness, unless you hold the fund interest until death, in which case your heirs get a stepped-up basis under IRC 1014 and the deferred gain disappears entirely.
Qualification isn’t automatic. Traditional providers like Goldman Sachs and Eaton Vance/Morgan Stanley typically require you to be a qualified purchaser, generally $5 million or more in investable assets, with minimum contributions in the $500,000 to $1 million range. Newer entrants have lowered the bar somewhat, opening similar structures to accredited investors with smaller minimums, though often with different lockup terms for that tier. Either way, this isn’t a product available to someone with a $150,000 concentrated position.
Running the Exchange Fund Math
Management fees on exchange funds typically run 1% to 1.5% or more annually, charged on the fund’s assets, not on your original contribution. On an $800,000 position, a 1.25% annual fee starts around $10,000 a year and compounds against a growing balance as the fund appreciates. Over seven years, depending on how the underlying portfolio performs, that fee drag realistically adds up to somewhere in the $75,000 to $120,000 range in cumulative cost, money you don’t pay if you sell and hold a diversified index fund with an expense ratio measured in hundredths of a percent instead of over a percent.
Weigh that fee drag against what you’re buying: immediate, complete removal of single-stock risk without paying $121,125 in tax today. If your stock craters 40% the week after you’d otherwise have sold it, the exchange fund investor already diversified away that risk and the seller didn’t. That protection has real value, it’s just not free, and it’s locked up for seven years regardless of whether your circumstances change.
Put the two paths side by side at the seven-year mark. The lump-sum seller paid $121,125 in tax in year one, reinvested $678,875 into an index fund, and has paid a few basis points a year in fund expenses ever since. The exchange fund investor paid nothing in year one, but has been quietly handing over 1%+ of a growing balance annually, and still owes capital gains tax on the original $600,000 (plus whatever the fund earned) whenever they eventually redeem and sell. The exchange fund only comes out ahead if the tax deferral plus the diversification benefit outweighs seven years of fee drag, and that math gets harder to win the smaller the position and the longer the fund underperforms a plain index.
When Each One Actually Wins
Exchange funds make sense when the position is large enough, and concentrated enough, that immediate diversification is worth paying for. Think $2 million-plus in a single stock, a net worth that clears the qualified purchaser bar, and a genuine seven-year time horizon where you won’t need that capital for a house down payment, a career change, or anything else. If a founder or very early employee is sitting on a position that’s 60% of their net worth, the fee and lockup are a reasonable price for sleeping better at night.
For the $800,000-with-$600,000-gain case we walked through, systematic selling wins on cost, on flexibility, and on outcome. You pay roughly $105,000 to $121,000 in tax depending on how you schedule it, you’re fully diversified within a few years instead of seven, you keep access to your money the whole time, and you’re not paying a stranger 1%+ a year to hold real estate you didn’t ask for. Most tech workers with RSU piles or ESPP buildup are in this bucket, not the exchange fund bucket, and the minimums alone rule most people out before the math even starts.
The Real Risks Nobody Mentions
Selling has one risk: you pay the tax now, on a schedule you control. Exchange funds carry a few more. Early redemption for any reason, medical emergency, divorce, a sudden need for cash, can force recognition of the original deferred gain, the exact outcome you joined the fund to avoid. The illiquid real estate sleeve that keeps the fund qualified under Section 721 also means your diversification isn’t as clean as it looks; you’re now exposed to real estate and leverage risk you didn’t have before. And because most people contributing to a given exchange fund are tech employees with concentrated tech stock, the resulting fund often ends up heavily weighted toward tech anyway. You traded single-company risk for single-sector risk and paid a fee for the privilege.
Common Questions
How much tax do you pay when you sell RSUs with large capital gains?
You pay long-term capital gains tax (0%, 15%, or 20% federally in 2026 depending on your total taxable income) plus a 3.8% Net Investment Income Tax if your MAGI exceeds $200,000 single or $250,000 married filing jointly. State capital gains tax applies on top in most states.
What is the minimum investment for an exchange fund?
Traditional providers like Goldman Sachs and Eaton Vance typically require qualified purchaser status (roughly $5 million in investable assets) with minimum contributions of $500,000 to $1 million. Some newer providers accept accredited investors with lower minimums and different lockup terms.
Can you get your money out of an exchange fund early?
Early redemption is possible but risky. Withdrawing before the seven-year holding period required under IRC Section 704(c)(1)(B) can trigger recognition of your original deferred capital gain, defeating the purpose of contributing to the fund in the first place.
Is a 10b5-1 plan required to sell concentrated company stock?
Only if you’re a corporate insider subject to trading restrictions and blackout periods. A 10b5-1 plan lets insiders schedule sales in advance as an affirmative defense against insider trading claims. Non-insiders can sell on any disciplined schedule they choose without one.
