Your stock portfolio has grown, and maybe it’s time to start thinking about diversifying or taking some cash out of the market. The two ways people typically do this are by selling stocks or contributing them to an exchange fund.
Neither option is better. Which you choose depends on how large the position is, whether you need the cash soon, and whether you meet the accredited investor requirements.
What happens when you sell your stocks
Sell an appreciated position outright, and three things happen at once. The gain becomes taxable immediately, at ordinary capital gains rates. You get full liquidity: whatever’s left after tax is yours to move anywhere, that day. And you keep full control over timing, since nothing obligates you to hold or reinvest a particular way.
Say you’re holding $600,000 in a single stock, with $400,000 of that as unrealized gain. Selling triggers a capital gains tax bill of roughly $140,000 at a combined federal and state rate near 35%, leaving about $460,000 to reinvest. That $460,000 is fully liquid and fully yours the moment the trade settles.
What happens when you contribute to an exchange fund
An exchange fund takes the same position but treats it in a different way. Instead of selling, you contribute the shares to a partnership structured under Section 721, so no capital gains tax is due at contribution. Instead of cash in hand, you get a proportional interest in the fund’s diversified holdings, deferring the tax rather than avoiding it. And instead of controlling the timing, you commit to the fund’s required holding period, typically seven years, before you can redeem.
Contribute that same $600,000 position instead of selling it, and the full amount stays invested. Nothing is set aside for a tax bill, because none is due yet.
Contributing to an exchange fund vs. selling stocks outright
| Selling outright | Exchange fund | |
| Tax treatment | Capital gains tax due immediately on the gain | Deferred until you eventually sell what you receive at redemption |
| Immediate liquidity | Full — cash in hand right away | None — locked up for the holding period, typically seven years |
| Diversification | When (and if) you redeploy the proceeds yourself | Built in immediately, a proportional share of the fund’s diversified holdings |
| Minimum investment / eligibility | None beyond having shares to sell | Accredited investor status, $100,000 minimum contribution |
| Control over timing/exit | Full — sell however much you want, whenever you want | Limited — redemption tied to the fund’s holding period, not your schedule |
When selling makes more sense for you
- The position is small enough that seven years of illiquidity outweighs the deferred tax savings
- You have a near-term cash need, a house, tuition, a retirement withdrawal, that a multi-year lock-up would conflict with
- You don’t meet the accredited investor bar exchange funds require
If selling is the right call for your position, it’s still worth looking at ways to soften the tax hit before you do.
When an exchange fund makes more sense for you
For a genuinely large concentrated position with no near-term cash need, deferring the tax could outweigh giving up liquidity for seven years.
- The position is large enough that the deferred tax bill is substantial
- You don’t need the cash in the next several years
- You meet the accredited investor bar and can commit the $100,000 minimum
- You’d rather have tax deferral and built-in diversification than liquidity and control
If you check these boxes, see if your position qualifies for Glidepath.
Which is best for you and your portfolio?
There’s no universal answer, because selling and contributing solve for different things. Selling wins on liquidity and control. You get cash today and can do anything with it. An exchange fund wins on tax treatment and diversification for a position large enough that the deferred tax bill matters and where you can afford to go without that capital for years.
If you’re holding a large, appreciated position with no near-term need for the cash, find out if you can contribute to Glidepath.