Let’s say you’re sitting on a position worth $500,000. The cost basis is only $80,000, so you’ve made significant gains. Now let’s say you decide to exit that position. Depending on your state, you could hand somewhere between $100,000 and $155,000 of it straight to federal and state tax collectors before a dollar reaches your bank account.
You might think this is the worst-case scenario. Unfortunately, it isn’t. This is what happens when a position is mostly unrealized gains.
Selling stock is a taxable event
Whenever you sell a stock for more than you paid for it, the difference is a capital gain, and capital gains are taxable in the year you sell. There’s no minimum amount that exempts you, and there’s no way to sell shares “under the radar.” Your broker reports the sale to the IRS on Form 1099-B regardless of the amount.
Short-term vs. long-term tax rates
If you’ve held the shares for more than a year, the gain is taxed at long-term capital gains rates, 0%, 15%, or 20% federally depending on income, calculated on sale price minus cost basis.
If you’ve held for less than a year, the gain is taxed at your ordinary income rate instead, which can run much higher.
That gap alone, a top earner paying 37% versus 20% on the same dollar of gain, is why holding period is often the single biggest lever an investor controls before selling.
This means when to sell isn’t only about selling at a profit. You can time it to lower capital gains.
What actually gets taxed
When you sell, you’re taxed on the gain (not the sale price), which is the sale price minus the cost basis. Cost basis is generally what you originally paid for the shares, or for stock received through employer compensation like RSUs, the fair market value at vesting. Get the basis wrong, and you either overpay or risk an IRS mismatch letter down the line.
The costs that stack on top of federal capital gains
Federal long-term rates aren’t the whole bill for many investors:
- Net investment income tax (NIIT): an additional 3.8% on investment income for individuals above $200,000 in modified adjusted gross income ($250,000 for married filing jointly)
- State capital gains tax: varies enormously — California taxes capital gains as ordinary income up to 13.3%, while states like Texas and Florida have no state capital gains tax at all
Combine a high federal bracket, NIIT, and a high-tax state, and the effective rate on a large sale can climb close to 40%.
Do exchange funds reduce capital gains tax?
There are several ways to reduce or defer capital gains tax on a stock sale. Here are the ones that come up most for a single large sale:
- Tax-loss harvesting: selling other positions at a loss in the same year to offset the gain
- Donating appreciated shares: giving stock directly to a qualified charity avoids the capital gains tax entirely and can still be deductible at fair market value
- Holding longer: crossing the one-year mark, or waiting for a lower-income year, changes the rate that applies
- Diversifying without selling: contributing appreciated shares to an exchange fund, where you exchange your position for a diversified basket instead of cashing out, is one of several ways to defer the capital gains tax rather than trigger it immediately
This last option matters most for people holding a large, single-stock position with a low cost basis relative to its current value. If most of what you’d sell is gain rather than principal, a Glidepath exchange fund lets you get out of the single-stock risk while keeping your capital invested and compounding instead of handing it to a tax bill this year.
When an exchange fund fits, and when it doesn’t
Exchange funds work well for large, appreciated, single-stock positions where the goal is diversification, not access to cash. They’re a poor fit if you need the proceeds for a near-term expense, since the tax deferral requires a multi-year holding period of its own. If you’re selling a modest position with a small embedded gain, the tax hit likely isn’t large enough to justify the tradeoff, and a straightforward sale is simpler.
Taxes when selling stocks are unavoidable
Selling stock always triggers a tax event, but how much you owe depends on holding period, cost basis, and where you live. For a large, low-basis position, you need to figure out whether selling and triggering tax makes more sense for your circumstances than diversifying without a sale.
Ready to do the latter and diversify while deferring capital gains?
