The Executive’s Guide to Hedging Low-Cost Basis Stock in 2026

You have spent years, perhaps decades, building a significant stake in your company. Whether you are an executive at a Fortune 500 firm or a key leader in a high-growth Chicago-based enterprise, that concentrated stock position may represent a substantial portion of your net worth.

The challenge is familiar: you want to diversify your wealth and reduce concentration risk, but the tax consequences of selling appreciated stock can be significant. Selling a large position with a low cost basis may result in substantial capital gains taxes.

As we move through 2026, market volatility and evolving tax rules continue to create challenges for executives with concentrated stock positions. As a fiduciary financial advisor in Barrington, we help clients evaluate strategies that may help manage risk and diversify holdings in a tax-efficient manner.

The 2026 Tax Context: Understanding the 23.8% Federal Capital Gains Rate

Before making any decisions, it is important to understand the potential tax consequences of selling appreciated stock.

For high-income taxpayers in 2026, long-term capital gains may be subject to a 20% federal capital gains tax rate. In addition, many investors may also be subject to the 3.8% Net Investment Income Tax (NIIT).

Federal Long-Term Capital Gains Rate: Up to 20%
Net Investment Income Tax (NIIT): 3.8%
Combined Federal Rate: Up to 23.8%, before considering applicable state taxes

For investors with substantial unrealized gains, these taxes can have a meaningful impact on after-tax wealth. As an asset manager in Chicago, we often help clients evaluate ways to diversify concentrated positions over time rather than through a single transaction.

The Zero-Cost Collar: Managing Downside Risk

For investors who are concerned about market volatility but are reluctant to sell because of potential tax consequences, a zero-cost collar may be worth considering.

A collar generally involves:

Buying a Put Option: A put option may help establish a downside protection level if the stock declines.
Selling a Call Option: The premium received from the call option may offset some or all of the cost of the put option.

When structured appropriately, a collar may provide a range of potential outcomes by establishing both a downside protection level and an upside cap. Investors should understand that collars limit participation in future appreciation above the call strike price and involve risks and tradeoffs.

Exchange Funds: Diversification Without Immediate Tax Recognition

Exchange funds are another strategy that may be appropriate for certain investors with concentrated stock positions. These are private investment partnerships in which participants contribute concentrated stock holdings in exchange for an ownership interest in a diversified portfolio.

Potential Benefits:

Broader diversification
Continued tax deferral
Reduced exposure to a single company

Potential Considerations:

Limited liquidity
Investment minimums
Typically a seven-year holding period to achieve intended tax treatment

For investors with a long-term time horizon, exchange funds may provide an opportunity to diversify while deferring recognition of capital gains taxes.

Direct Indexing: A Tax-Aware Diversification Strategy

At Virtue Asset Management, we often discuss tax-efficient investing in Chicago through direct indexing strategies. Rather than owning a single index fund, direct indexing involves owning many of the individual securities within an index through a separately managed account.

This approach may create opportunities for ongoing tax-loss harvesting.

Tax-Loss Harvesting: Realizing losses in individual securities to potentially offset taxable gains. Check out our guide on 7 Mistakes You’re Making with Tax-Loss Harvesting to see how to avoid common pitfalls.
Gradual Diversification: Harvested losses may help offset gains associated with the sale of concentrated stock positions.

Depending on market conditions and individual circumstances, direct indexing may improve after-tax outcomes and provide additional flexibility when implementing a diversification strategy. This type of strategy can play an important role in retirement planning in Barrington IL and long-term wealth management.

The Value of Personalized Advice

The strategies discussed above can be complex and may require coordination among investment, tax, and legal professionals.

As an independent wealth management firm in Chicago, Virtue Asset Management works with clients to evaluate how concentrated stock positions fit within their broader financial plan. Our approach includes:

Fiduciary Advice: We are legally obligated to act in our clients’ best interests as a fiduciary financial advisor in Chicago.
Personalized Planning: We evaluate stock positions alongside retirement, tax, estate, and cash-flow considerations. For complex estates, we often look at strategies like Dynasty Trusts to lock in growth outside the estate.
Executive Compensation Expertise: We help clients understand how concentrated stock positions interact with RSUs, NQSOs, stock options, and 10b5-1 plans.

Taking the Next Step

Managing a concentrated low-cost basis stock position involves balancing investment risk, tax considerations, and long-term financial goals.

Whether you are looking for a fee-only financial planner in Barrington or an experienced fiduciary financial advisor in Barrington, it is important to work with an advisor who understands the unique challenges associated with concentrated stock positions.

If you would like to discuss your situation, contact Virtue Asset Management to schedule a consultation at our Barrington or Chicago offices. Together, we can evaluate available strategies and determine which approach may be appropriate based on your objectives and circumstances.

Disclaimer: Virtue Asset Management is a fee-only registered investment adviser. This article is for informational purposes only and should not be construed as investment, legal, or tax advice. All investments involve risk, including the potential loss of principal. Hedging strategies, including collars, involve risks and may not be suitable for all investors. Tax laws and regulations are subject to change. Please consult your tax advisor and other professional advisors regarding your specific situation.