Here's How to Access the Value of Your Concentrated Stock Position Without Creating a Big Tax Bill

As a senior manager or executive of a publicly traded company, you are likely paid a significant portion of your total compensation in the form of company stock, making it easy to build up a concentrated position in that stock over time. And should you need access to a large amount of cash, it is equally as easy to sell some or all of those stock shares and transfer the proceeds to your bank account following settlement. However, turning those stock certificates into actual dollars will almost always create a taxable event.

There are many ways that you might earn and receive stock-based compensation as part of your employment agreement, which means that each share you own may have a different set of rules regarding its tax treatment. Nonetheless, it is safe to assume that once the vesting requirements have been satisfied and ownership of any shares have been transferred from the company to you, so will the tax liability. And keep in mind that those in positions where equity awards make up a significant portion of total compensation are usually the same people who command the highest salaries at the company and are already in one of the higher marginal tax brackets.

It is always important to consider all possible outcomes of a stock transaction, not just its tax implications. However, for those with a low basis in the stock they wish to sell, it is almost impossible to ignore the potential tax implications. Depending on the length of time a stock is held, either long-term or short-term capital gains taxes will have to be paid.

For someone who has held a stock for less than 12 months, there is good reason to be cautious. At the time of this writing, short term capital gains receive ordinary income tax treatment. This means that any shares that you decide to liquidate within 12 months of vesting will receive the more punitive type of capital gains treatment. Rather than selling the stock, realizing a gain, and paying any applicable taxes, there is a better alternative.

There is an option available through most major brokerage firms called a Securities-Backed Line of Credit (SBLOC), which allows you to borrow against a stock portfolio the same way a mortgage company allows homeowners to borrow against the equity in their house using a home equity line of credit (HELOC). Using this strategy allows you to maintain your stock position(s), participate in any long-term growth of the shares, and avoid adding to your tax bill all at once, thereby allowing you to have your cake and eat it too.

The line of credit may be used to fund predictable expenses, such as purchasing a home, funding a big vacation, or paying a child’s tuition. However, having access to a standing line of credit may also prove valuable in situations that require emergency access to cash, such as a major medical procedure or a home repair. It can also help eliminate the compulsion to hold large cash reserves in checking or savings accounts that pay minimal interest and allow you to put more of your money to work.

The only thing you are not permitted to use a SBLOC for is to purchase additional investments. This includes refinancing or repaying margin loans, or any other loan used for securities purchases. A margin loan is the only type of securities backed line of credit you may use to purchase stocks or other investment securities.

Having an SBLOC in place gives you liquidity when you need it while allowing you to maintain both control over the investment itself and the timing of any potential taxes associated with selling the stock. Whenever you wish to access loan funds, you would simply write a check against the line of credit or provide instructions to your brokerage firm to wire funds to a bank account.

Depending on the size of your stock portfolio and the financial institution where your shares are held, loan sizes can range anywhere from $100,000 to $10 million. The lender will often make available a line of credit ranging from 50% (for a more concentrated grouping of stocks) to 90% (for a more conservative grouping of treasury bonds) of the underlying securities' market value. The exact amount will depend on the specific assets held in the portfolio, their perceived risk, and the portfolio’s diversification, if any.

These loans have terms that are tailored to the borrower; however, they are typically made up of some combination of the prime interest rate or the London Inter-Bank Offering Rate (LIBOR) plus an interest spread. This spread varies. However, the larger the portfolio value, the lower the interest rate, and most securities-backed loans offer an interest-only payment feature.

It is advisable to keep the usage of the SBLOC below 50% of its available buying power at all times. As the value of the underlying collateral changes, the credit capacity of the account fluctuates proportionally. And if the line is overutilized, this may make it necessary to deposit additional collateral either in the form of cash or by depositing other stocks, otherwise known as a capital call. The borrower can also repay some or all of the outstanding loan balance using cash at any time without any prepayment or cancellation fees.

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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants. 

Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits. 

 Disclosures:

The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.

Investments in securities and insurance products are:

NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE