How to handle 5M capital gain (post-IPO)

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fluter
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How to handle 5M capital gain (post-IPO)

Post by fluter » Tue Oct 15, 2019 11:26 pm

A company that I worked for when it was a very early stage startup had an IPO earlier this year. I've been holding restricted stock that is now liquid, and worth ~4.8M. After the IPO lock-out expired, I sold 30% to lock in some gain (and help myself sleep at night), and I'm trying to decide what to do with the rest (~3.3M left in stock). I want to diversify the concentrated position into index funds. The gain is long term, but I live in CA, so state taxes are steep. (Moving to a lower tax state is not a possibility for the next few years.)

I'm 36, married with one kid. My portfolio outside this position is ~1M, in a mix of index funds (Schwab) and short/mid term bonds. I don't have any debts, and don't own real estate.

I'd appreciate any thoughts on how you would approach this situation (maybe "problem" isn't the right word). Would you just sell over time and pay the tax? I have spoken with a couple advisors (fee-only, 1% AUM), who have recommended more exotic strategies such as exchange funds, opportunity zone funds, and covered calls. Up until now I have been a DIY investor following the BH philosophy (and have been happy with that). I'm trying to weigh the pros and cons of just selling and paying the tax versus paying an advisor to help minimize the tax.

Thanks,
Parker

Edit:
I have read the Wiki page on Managing a Windfall.
Last edited by fluter on Wed Oct 16, 2019 1:01 pm, edited 1 time in total.

TheEleven
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Re: How to handle 5M capital gain (post-IPO)

Post by TheEleven » Tue Oct 15, 2019 11:41 pm

fluter wrote:
Tue Oct 15, 2019 11:26 pm
I'd appreciate any thoughts on how you would approach this problem.
What problem?

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LittleGreenSoldiers
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Re: How to handle 5M capital gain (post-IPO)

Post by LittleGreenSoldiers » Tue Oct 15, 2019 11:43 pm

Welcome to the forum Fluter.
While all startup aren't the same, kudos for taking some initial gains right out of the gate. I personally would take as much as I could this year and in Jan 01, 2020 as your tax situation makes sense.
Moving forward what does you're situation look like? Do you plan to stay with current startup employer or move on?

Read the wiki's on the forum and stay the course. OH! and take your time to figure out what to do with your windfall. Yep, this wonderful forum has a wiki on that too.

All the best!
LGS

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unclescrooge
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Re: How to handle 5M capital gain (post-IPO)

Post by unclescrooge » Tue Oct 15, 2019 11:46 pm

OZone funds would remove the issue of capital gains if held 10 years. However, I would worry that these funds are being overbid and may not actually be good investments.

If you have the capability to assess the value of such an investment, it might be worth looking into.

EnjoyIt
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Re: How to handle 5M capital gain (post-IPO)

Post by EnjoyIt » Tue Oct 15, 2019 11:50 pm

If I had 3 million in capital gains and had to pay huge amounts of state taxes, I would do everything in my power to legally move to a no tax state for a minimum 184 days of the year. This is especially true if I lived in California and 12.3% of it was to be taxed away.

HEDGEFUNDIE
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Re: How to handle 5M capital gain (post-IPO)

Post by HEDGEFUNDIE » Tue Oct 15, 2019 11:51 pm

If somebody handed you $3.3M (minus taxes), would your first thought be to put it all in this stock?

That is essentially the decision you are making every day you hold onto it.

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noraz123
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Re: How to handle 5M capital gain (post-IPO)

Post by noraz123 » Tue Oct 15, 2019 11:54 pm

If you had $3.3M in cash, what would you do? Buy stock in this company? If not, sell.

Bogleheads will mostly agree holding this much in a single stock is too risky. I agree that the right thing to do is to diversify.

Moving to a lower tax state is out of the question, then I'd sell, pay the taxes and get some more diversification. Paying taxes on large capital gains is a good problem to have. :happy

You may want to keep some stock in case it's the next Google or Amazon, so you don't feel bad that you sold.

Remember that buying index funds yields more than diversification, it also makes tax loss harvesting much easier (you can sell an S&P 500 fund and immediately buy a total market fund or vice versa so as to get the tax loss but not miss out on overall market gains). Hard to do that with a single company's stock.

Sell stock, buy index funds, pay tax, and enjoy! You've earned it.

Flora
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Re: How to handle 5M capital gain (post-IPO)

Post by Flora » Tue Oct 15, 2019 11:57 pm

Investing in a QOZ fund can defer and reduce the realized capital gain but doesn't remove the issue of capital gain completely.

HomeStretch
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Re: How to handle 5M capital gain (post-IPO)

Post by HomeStretch » Wed Oct 16, 2019 12:02 am

Your stock “windfall” may be enough to completely secure the financial future for you and your family. That is a huge incentive to sell the stock now (or split between now and January if you want to do this over two tax years), pay whatever taxes you need to and invest the remainder in a simple DIY low-cost tax-efficient 3-fund portfolio.

toast0
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Re: How to handle 5M capital gain (post-IPO)

Post by toast0 » Wed Oct 16, 2019 12:11 am

Is there a chance that some of this stock was purchased when the company was a qualified small business? The QSBS exclusion is rather nice, if you qualify. Otherwise, be sure to consider donating the appreciated stock in-kind; you get to avoid realizing the capital gain, and deduct the fair market value. Also, make sure to stay on top of quarterly tax payments; California doesn't have a safe harbor at high incomes.

There's not much to be done to minimize the taxes here if you're going to diversify, you're going to have to sell this holding, and that's going to incur capital gains. If you were planning to move out of California anyway, waiting until after you moved would certainly help. I would run some taxcaster simulation to see if there's much benefit to splitting the selling into this year and next, but it's probably not significant, unless your other income is pretty low.

You could look into a Charitable Remainder Trust as an exotic way to diversify without paying taxes right away, but I don't think they really make that much sense with the current rules.

Once you've sold the stock, there's no reason not to stay with BH strategies. Three fund works pretty well from $100 to $100M. Tax efficiency is more actionable at your asset level, of course.

shess
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Re: How to handle 5M capital gain (post-IPO)

Post by shess » Wed Oct 16, 2019 12:48 am

noraz123 wrote:
Tue Oct 15, 2019 11:54 pm
If you had $3.3M in cash, what would you do? Buy stock in this company? If not, sell.
THIS! The fact that you imagine you could do tricky things to avoid taxes in no way influences whether you actually _can_ do tricky things to avoid taxes! Good on you for selling a big tranche and locking those gains in, it would feel really silly to have held on for more and missed out!

For the pre-IPO shares I held, I took an approach of selling to my stress tolerance. When the stock was a huge percentage of my portfolio and rising all the time, I was freaking out, so I'd sell some shares to let off steam. But as I diversified, the absolute value of the rest of my portfolio grew, which made me less nervous. This, combined with my position's performance dampening as the company grew, meant that eventually I reached an equilibrium where I was comfortable. Originally, this was when my concentrated position was around 20% of my portfolio, but since then the position has grown somewhat faster than the market, so now it's more like 24% and I'm not super nervous. Mostly because the rest of my portfolio is sufficient, and I sold shares to pay down my mortgage and other liabilities.

My theory on those remainder shares is that the company is basically now a largecap growth company, so it's simply not as risky to hold as it was a decade ago (I am not saying it is safe as houses, it's still riskier than the overall market). Having shares which are made up of almost 100% capital gains is nice for things like contributions to charity (or a donor-advised fund), and will get a nice step-up if I manage to leave them to my heirs. With the DAF, note that deductibility of contributed shares can be limited to a percentage of income, so if you decide to make large DAF contributions, it's good to do that in a year when your income is high, probably due to large share sales. IMHO, for a situation like this a DAF is a no-brainer for at least like $500k of it.

One technique which you're just in range of considering is an "exchange fund". For this, you pool your shares with other fund holders, everything is held for 7 years, then when you cash out you get a mix of the collected shares, while retaining your original basis. This gives you more diversification than you had before - but it's not going to give you anything like VTI's diversification, because obviously the input shares are going to be biased towards the same kinds of shares you had, since there are fewer people receiving large blocks of utility or energy shares as compared to startups.

I did not make use of an exchange fund, but know people who did - I kind of wish I'd put up a minimum amount to see how it worked, and then considered another tranche two or three years later if that looked good. But, honestly, I'm not upset that I didn't, either, because I also appreciate the simplicity of my portfolio (basically 3-fund, plus my remaining concentrated position).

bluquark
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Re: How to handle 5M capital gain (post-IPO)

Post by bluquark » Wed Oct 16, 2019 1:15 am

Are you planning to hold onto this individual stock all the way until you die and your child gets the step-up in basis? And are you further willing to assume estate tax law will even work the same way by then? If not, then you are going to pay at least the federal part of the tax sooner or later.

15% of 3.3M is 500K. By selling, you aren't actually losing the 500K since the government "already owns" it in some sense. Rather, you would lose the time-value of the growth of it until you're ready to sell. Assuming (for the sake of making a reasonable estimate) that the individual stock behaves like the expected market average and returns 6% a year, that is $30K a year you might be saving by not diversifying.

Is that $30K really sufficient compensation for the risk that your net worth gets irreversibly crushed by 50%, which routinely happens for mid-sized tech companies even in the midst of this bull market, let alone a correction? The classic phrase "collecting pennies in front of a steamroller" comes to mind.

Also, 15%*6% is 0.9%, so anybody offering you a 1% AUM product to somehow let you diversify without paying taxes is selling you a financial product that will leave you slightly poorer even if their complex scheme totally works as intended.
Last edited by bluquark on Wed Oct 16, 2019 1:41 am, edited 6 times in total.

bltn
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Re: How to handle 5M capital gain (post-IPO)

Post by bltn » Wed Oct 16, 2019 1:27 am

EnjoyIt wrote:
Tue Oct 15, 2019 11:50 pm
If I had 3 million in capital gains and had to pay huge amounts of state taxes, I would do everything in my power to legally move to a no tax state for a minimum 184 days of the year. This is especially true if I lived in California and 12.3% of it was to be taxed away.
To save 400,000 dollars in state income tax on the sale of my stock, I might look into establishing a legal residence in Nevada. At least temporarily.
Maybe that s not feasible. But giving up a million dollars in total capital gains taxes is a hard pill to swallow.

rossington
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Re: How to handle 5M capital gain (post-IPO)

Post by rossington » Wed Oct 16, 2019 1:37 am

Taxes should not be your main consideration here. Locking in your gains are your first priority.
Unless you think that this is an investment worth holding long term.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

Dovahkiin
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Re: How to handle 5M capital gain (post-IPO)

Post by Dovahkiin » Wed Oct 16, 2019 1:37 am

Were you a California employee during any part of your stock grant? Did they come from RSUs? ISOs? If so, CA has some complex rules that you'll need a CPA and possibly a lawyer to navigate when/if you performed services in California while vesting/exercising ISOs, RSUs, etc:

https://www.ftb.ca.gov/forms/misc/1004.html

There are tax cases where the FTB has gone after people who moved out of state. It's very much worth using professional advice when $400k is at the stake especially if CA tacks on penalties to $400k.

Also this article on domicile issues:
https://www.vox.com/2019/2/6/18211362/u ... ipo-wealth

shess
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Re: How to handle 5M capital gain (post-IPO)

Post by shess » Wed Oct 16, 2019 1:49 am

bltn wrote:
Wed Oct 16, 2019 1:27 am
EnjoyIt wrote:
Tue Oct 15, 2019 11:50 pm
If I had 3 million in capital gains and had to pay huge amounts of state taxes, I would do everything in my power to legally move to a no tax state for a minimum 184 days of the year. This is especially true if I lived in California and 12.3% of it was to be taxed away.
To save 400,000 dollars in state income tax on the sale of my stock, I might look into establishing a legal residence in Nevada. At least temporarily.
Maybe that s not feasible. But giving up a million dollars in total capital gains taxes is a hard pill to swallow.
To be in the 12.3% bracket in California, you'll also be paying 20% on marginal federal gains plus 3.8% NIIT. Maybe move to Switzerland?

No, no, don't do that, the above was a joke! If you attempt to move temporarily to another jurisdiction to avoid taxes, IMHO there's a good chance that the taxman will figure it out and get the taxes _and_ some penalties. DEFINITELY consult a qualified professional before attempting. I know some people who had an IPO windfall and moved because now they no longer had a reason to live in California, but I don't think the tax situation was the sole driver. Moving elsewhere also meant their cost of living went down enough that they no longer needed to work, which is a big draw. And it's been over a decade and they didn't move back, so it seems like it wasn't a tax dodge.

That said ... I was happy living in California before I had a windfall plus a large tax bill. Receiving the windfall did not make me _less_ happy about living here, I like the weather and stuff. I could see that being different if the only reason you live here is for work, or something else like that where the windfall immediately changes the justification.

TIAX
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Re: How to handle 5M capital gain (post-IPO)

Post by TIAX » Wed Oct 16, 2019 2:13 am

Move to Texas, sell, move back later if you want. Will be FI?

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Wed Oct 16, 2019 2:23 am

fluter wrote:
Tue Oct 15, 2019 11:26 pm
A company that I worked for when it was a very early stage startup had an IPO earlier this year. I've been holding restricted stock that is now liquid, and worth ~4.8M. After the IPO lock-out expired, I sold 30% to lock in some gain (and help myself sleep at night), and I'm trying to decide what to do with the rest (~3.3M left in stock). I want to diversify the concentrated position into index funds. The gain is long term, but I live in CA, so state taxes are steep. (Moving to a lower tax state is not a possibility for the next few years.)

I'm 36, married with one kid. My portfolio outside this position is ~1M, in a mix of index funds (Schwab) and short/mid term bonds. I don't have any debts, and don't own real estate.

I'd appreciate any thoughts on how you would approach this problem. Would you just sell over time and pay the tax? I have spoken with a couple advisors (fee-only, 1% AUM), who have recommended more exotic strategies such as exchange funds, opportunity zone funds, and covered calls. Up until now I have been a DIY investor following the BH philosophy (and have been happy with that). I'm trying to weigh the pros and cons of just selling and paying the tax versus paying an advisor to help minimize the tax.

Thanks,
Parker
I was once in a similar position albeit an order of magnitude less. I thought my employer was well positioned in the downturn. Stock dropped over 90% before I sold (as part of a redundancy package).

So my advice to you is to sell as much as you can, and pay the bloody tax. It's not money until you have cashed it in.

There's worse problems in life than having a big tax bill.

Your employer can be doing alright, and then the stock market slump comes, and all their equity financed customers dry up, and the PE the market puts on your earnings can drop 80-90%. At least that was my experience in 2000-03.

Diversify, then. And be sure to keep $1m in US Treasury bonds or other dead safe assets. So you will always be a millionaire, even as the tide goes out.

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Wed Oct 16, 2019 2:25 am

rossington wrote:
Wed Oct 16, 2019 1:37 am
Taxes should not be your main consideration here. Locking in your gains are your first priority.
Unless you think that this is an investment worth holding long term.
Single stock risk, especially in your employer, is not worth bearing. Very few of us work for Microsoft at IPO.

Keep single stock risk to 10% of net wealth if one can. Stock in your own employer is really just another form of salary compensation.

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Re: How to handle 5M capital gain (post-IPO)

Post by mrspock » Wed Oct 16, 2019 2:55 am

I have been in a similar albeit smaller situation (but still 7 figs). I would sell in January, diversify into index funds, and then hope the market tanks in the next 11 months so you can TLH away your taxable gains. Eventually the broad market will recover, the same cannot be said for single concentrated stock positions. Worst case, the market goes sideways any you have to pay the taxman. In best case, market goes up and you will feel better about paying your taxes. 2/3 scenarios you do pretty well, given enough patience.

Beyond moving to a no tax state, there is no “trick” to getting out of paying the tax man. You did well, be thankful... don’t get greedy.

fru-gal
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Re: How to handle 5M capital gain (post-IPO)

Post by fru-gal » Wed Oct 16, 2019 3:10 am

I had a relative who kept all his stock (over my semi-dead body) in a startup becoming a larger company and one day it dropped 50%.

cableguy
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Re: How to handle 5M capital gain (post-IPO)

Post by cableguy » Wed Oct 16, 2019 6:00 am

I’ve been in this situation. Couple of ideas. You sell it all ASAP. You can sell 2/3 and let 1/3 ride. You can set up stop loss orders to protect your downside. I like the trailing high stop loss or whatever they call it where you can say “sell when the stock goes below 5% of its high”. Whatever you do.....protect yourself. Don’t just ride it out. Be careful. It’s a life changing event.

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TomatoTomahto
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Re: How to handle 5M capital gain (post-IPO)

Post by TomatoTomahto » Wed Oct 16, 2019 6:55 am

Why do otherwise sensible BHs lose their compass when the numbers get large? Sell at least 80% of the stock and invest it as you ordinarily do. I would personally sell every last single share, but that's me. Thank the stars that it's capital gains and not earned income. Anything else, imo, is tempting fate. I have seen people make or lose millions by retaining stock. We would have made 7 digit gain in one company's RSUs, and would have lost a 7 digit amount in another company. We always sell when shares vest.
Okay, I get it; I won't be political or controversial. The Earth is flat.

Seasonal
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Re: How to handle 5M capital gain (post-IPO)

Post by Seasonal » Wed Oct 16, 2019 7:01 am

fluter wrote:
Tue Oct 15, 2019 11:26 pm
I'd appreciate any thoughts on how you would approach this problem. Would you just sell over time and pay the tax? I have spoken with a couple advisors (fee-only, 1% AUM), who have recommended more exotic strategies such as exchange funds, opportunity zone funds, and covered calls.
I'd explore the exotic options some more, with the advisors and with a tax lawyer with expertise in this area. If you can do a tax-free exchange into something diversified or use options to reduce downside risk until you sell, the associated fees may be less than the taxes you'd pay if you sold now. I'd do this quickly, as the longer you hold the more risk you take.

If the strategies don't make sense, just sell. Which would make you feel worse, a large drop while waiting or paying more taxes?

Startled Cat
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Re: How to handle 5M capital gain (post-IPO)

Post by Startled Cat » Wed Oct 16, 2019 7:26 am

Some posters have suggested using opportunity zone funds for capital gains deferral. Keep in mind that California’s tax code does not conform, so this would not help defer or reduce state taxes (as far as I understand). Also, to get the full federal tax benefit, you would need to reinvest by the end of this year.

Between that and the illiquidity and general dubiousness of most of the QOFs out there, I’d caution you to only do this with a reasonable fraction of the gains, if at all.

aristotelian
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Re: How to handle 5M capital gain (post-IPO)

Post by aristotelian » Wed Oct 16, 2019 7:48 am

This is a case where it could be helpful to look at asset allocation in absolute as well as relative terms. You have enough stock to make yourself financially independent and take care of your family in perpetuity. Figure out that number (general rule is 25X expenses, 30X if you are conservative) and make sure you have that much invested in a diversified portfolio. Above that number, you can really do what you want depending on your risk tolerance. If you believe in the stock and don't want to take a guaranteed hit on taxes, you could certainly hold and sell slowly over time.

Regarding Opportunity Zone stuff, I believe Fundrise is starting to get into it. However, I would regard any of those investments as just as risky as your company stock.
https://fundrise.com/education/blog-pos ... nity-zones

Either way, consult the Windfall section on the Wiki and don't make any rash decisions.

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Re: How to handle 5M capital gain (post-IPO)

Post by bloom2708 » Wed Oct 16, 2019 8:06 am

I would pay the tax in 2019. Yes, it might be a lot of tax, but it is a nice windfall.

Get it in the rear view mirror. Invest simply and tax efficiently going forward. No 1% AUM junk.

Spend time here and ask questions, look at example portfolios. Congrats.
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Re: How to handle 5M capital gain (post-IPO)

Post by missingdonut » Wed Oct 16, 2019 8:50 am

To the extent that you have any charitable intentions over the next several years, Donor Advised Fund (DAF).

Perhaps split the sale between a couple years to take advantage of filling up lower tax brackets?

wolf359
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Re: How to handle 5M capital gain (post-IPO)

Post by wolf359 » Wed Oct 16, 2019 9:08 am

I'm not sure if I'm the one who's off, but my numbers seem to be completely different than those being tossed around. Therefore, I will try to back mine up with sources.

You're talking to fiduciary advisors, which is good, but you may be talking to the wrong ones. Since they're being paid with assets under management, they have an incentive to manage your funds, and propose things that only they can help you do (thus the exotic strategies.) You are talking to people who want to manage your investments; you're looking for straight investment advice. If you were to have someone manage the portfolio, 1% AUM is typical for $1 million portfolios, but is too high for your greater level of assets.

I'd suggest talking to a tax CPA who specializes in your situation for the best tax strategies. You will probably pay a fee for the consultation.

For a financial advisor, you're looking for one who is willing to consult and build you an investment plan for you to execute, not for them to execute for you.

If you follow previously given advice, you will pay 20% in capital gains tax, 3.8% in net investment income tax, 12.3% in California income tax, and 1% in California "millionaire's tax" (officially known as the Mental Health Services Tax), for a total tax rate of 37.1%.

Immediately cashing out your remaining $3.3 million will cost you $1.2 million in taxes. Assuming you cashed out your original 1/3 this year, the total tax bill for cashing out your entire $5 million capital gain in a single year is at least $1,855,000.

I am not a lawyer, nor an accountant, nor do I claim any special expertise in California or Federal income taxes. But I do think that it is prudent to stop, take a breath, and read the Wiki on managing a windfall. (https://www.bogleheads.org/wiki/Managing_a_windfall) Don't make any sudden or rash moves. Plan it out before you take action.

I don't know if the other advice you're being provided is informed or not, but this may be a situation where you seek professional advice. At the very least, follow the guidance on Windfalls. Immediate cash-out as some are advising may or may not be your best move, but be sure of it before you do anything irreversible.

You will be balancing risk of holding a single asset versus the tax consequences. Don't rush the decision.

References:
Assumption: Married filing jointly

- Capital gains tax is 20%, not 15%, because income will be above $479,000 Source: https://www.irs.gov/taxtopics/tc409

- Additional net investment income tax of 3.8% applies in addition to capital gains, because income is above $250,000. Source: https://www.irs.gov/newsroom/capital-ga ... -to-know-0

- California max income tax is 12.3%, but if income exceeds $1 million in a year, then an extra 1% Mental Health Services Tax kicks in, making the overall tax rate 13.3%. Source: https://www.bankrate.com/finance/taxes/ ... ornia.aspx (more readable)
https://www.ftb.ca.gov/forms/2018/18-54 ... ther-taxes (more authoritative)

- Attempting to move from California for tax purposes takes at least 18 months and California aggressively pursues former residents who are moving out and coming back solely to avoid California taxes. Source: https://www.forbes.com/sites/robertwood ... 2870721694
Last edited by wolf359 on Wed Oct 16, 2019 9:29 am, edited 3 times in total.

HomeStretch
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Re: How to handle 5M capital gain (post-IPO)

Post by HomeStretch » Wed Oct 16, 2019 9:19 am

OP, some of the posts discuss tax management and some discuss risk management. If you decide your priority is risk management and thus decide to sell ASAP, don’t let the tax bill (which you should minimize as best as possible) dissuade you from locking in gains/diversifying.

wolf359
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Re: How to handle 5M capital gain (post-IPO)

Post by wolf359 » Wed Oct 16, 2019 9:24 am

Oh, and congratulations on your success!
:sharebeer

poor & ignorant soul
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Re: How to handle 5M capital gain (post-IPO)

Post by poor & ignorant soul » Wed Oct 16, 2019 9:28 am

Congratulations, you have won the game.

Now the hard part is to stop playing. :beer

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onthecusp
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Re: How to handle 5M capital gain (post-IPO)

Post by onthecusp » Wed Oct 16, 2019 9:41 am

Seasonal wrote:
Wed Oct 16, 2019 7:01 am
fluter wrote:
Tue Oct 15, 2019 11:26 pm
I'd appreciate any thoughts on how you would approach this problem. Would you just sell over time and pay the tax? I have spoken with a couple advisors (fee-only, 1% AUM), who have recommended more exotic strategies such as exchange funds, opportunity zone funds, and covered calls.
I'd explore the exotic options some more, with the advisors and with a tax lawyer with expertise in this area. If you can do a tax-free exchange into something diversified or use options to reduce downside risk until you sell, the associated fees may be less than the taxes you'd pay if you sold now. I'd do this quickly, as the longer you hold the more risk you take.

If the strategies don't make sense, just sell. Which would make you feel worse, a large drop while waiting or paying more taxes?
Similar advice, if it does not pan out with a CPA's analysis, and maybe a tax lawyer, just sell and pay the tax, it is still a huge windfall compared to your previous investable assets. Hire a CPA, at an hourly rate, you can work with on taxes and advice.

Skip the AUM advisors - they want 1% ($35,000/yr!!!) and to churn what you have for more fees. There is plenty of advice to be had here to take care of your investing yourself after your unwind this windfall in the best way for you.

I would explore option contracts as well, but would stay away from any exotic option schemes. I would think a CPA could give good advice on the cost of buying put options (as insurance on the stock price going down) vs the tax savings of stretching out your stock sales over an extra year, two, or three.

Selling covered calls is a version of that, but is more complicated in ways that sound attractive and lower cost, but may hide other risks. The biggest risk is being sucked into the advisor's orbit "because they understand this stuff."

MrDrinkingWater
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Re: How to handle 5M capital gain (post-IPO)

Post by MrDrinkingWater » Wed Oct 16, 2019 10:08 am

If you live between Hollister and Petaluma, there are probably quite a few financial planners and tax accountants who specialize in serving people who are in your fortunate situation. It appears you conversed with two people so far: one is a fee-only planner/advisor and the other is a 1% AUM advisor. I suggest you widen your search. Find two more fee-only planners to interview. It is worth the $500 to $1000 it might cost to converse with them. If they don't seem to measure up or don't seem fairly-priced, go find two more to interview.

You need to find the best suitable person to help you navigate your way forward by looking at a few more practitioners before undertaking action.

I agree with the other members who suggest that, within two years time, you should have no more than 10% of your combined net worth with your spouse be in you and your spouse's employers' company stock, no matter how great and successful your employers might be.

ScaledWheel
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Re: How to handle 5M capital gain (post-IPO)

Post by ScaledWheel » Wed Oct 16, 2019 10:13 am

Depending on how long you've been gone, you know more about your former company's competitive advantage and position in the market than us. If it has had a good post-IPO trajectory, I would be inclined to "dollar cost average" out of your holdings in the next couple years, maybe holding a very small amount relative to your initial holdings at the end.

But, I would definitely make an appointment with a tax attorney and a few more fee-only planners that specialize in your scenario. There are surely a number who have dealt with similar cases (and much larger sums) in your area that could provide specific guidance based on CA taxes and your situation.

Congratulations on your hard work and good fortune!

fujiters
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Re: How to handle 5M capital gain (post-IPO)

Post by fujiters » Wed Oct 16, 2019 10:18 am

I just want to echo the recommendations to look into options as a way to hedge to avoid selling it all in one year. See:

https://www.investopedia.com/articles/s ... sition.asp
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

EnjoyIt
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Re: How to handle 5M capital gain (post-IPO)

Post by EnjoyIt » Wed Oct 16, 2019 10:28 am

fujiters wrote:
Wed Oct 16, 2019 10:18 am
I just want to echo the recommendations to look into options as a way to hedge to avoid selling it all in one year. See:

https://www.investopedia.com/articles/s ... sition.asp
Thanks for sharing the link. It was very educational.

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Wed Oct 16, 2019 10:52 am

TomatoTomahto wrote:
Wed Oct 16, 2019 6:55 am
Why do otherwise sensible BHs lose their compass when the numbers get large? Sell at least 80% of the stock and invest it as you ordinarily do. I would personally sell every last single share, but that's me. Thank the stars that it's capital gains and not earned income. Anything else, imo, is tempting fate. I have seen people make or lose millions by retaining stock. We would have made 7 digit gain in one company's RSUs, and would have lost a 7 digit amount in another company. We always sell when shares vest.
+1

Sell. Just sell. Keep 10 per cent maybe.

gougou
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Re: How to handle 5M capital gain (post-IPO)

Post by gougou » Wed Oct 16, 2019 10:54 am

HEDGEFUNDIE wrote:
Tue Oct 15, 2019 11:51 pm
If somebody handed you $3.3M (minus taxes), would your first thought be to put it all in this stock?
This is not equivalent. It's more like, if you had $2M cash (basically $3.3M minus 40% tax), do you want to exchange it into $3.3M worth of single stock but have to pay capital gain tax when you sell those stocks.

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Re: How to handle 5M capital gain (post-IPO)

Post by gougou » Wed Oct 16, 2019 11:06 am

fluter wrote:
Tue Oct 15, 2019 11:26 pm
... and covered calls ...
Covered calls is a pretty simple strategy which you can execute all by yourself. For example, the stock price is $100, you could sell call options with strike $120 and earn premiums if the stock does not rise above $120.

You could also purchase protective put options until you've moved to a no tax state.
Last edited by gougou on Wed Oct 16, 2019 11:13 am, edited 1 time in total.

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bligh
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Re: How to handle 5M capital gain (post-IPO)

Post by bligh » Wed Oct 16, 2019 11:13 am

fluter wrote:
Tue Oct 15, 2019 11:26 pm
I'd appreciate any thoughts on how you would approach this problem. Would you just sell over time and pay the tax? I have spoken with a couple advisors (fee-only, 1% AUM), who have recommended more exotic strategies such as exchange funds, opportunity zone funds, and covered calls. Up until now I have been a DIY investor following the BH philosophy (and have been happy with that). I'm trying to weigh the pros and cons of just selling and paying the tax versus paying an advisor to help minimize the tax.

Thanks,
Parker
Parker,

Life is a journey with good fortune and bad fortune. It is your good fortune that you were in the right place, at the right time and had the ability and work ethic to earn your windfall. Congratulations! It is your bad fortune that you did it in California, where you will be taxed more than you would like.

If you are choosing to hold on to your stock position to avoid this taxation, you are taking on a massive risk. It is a roll of the dice. You may be able to move out of California, go a good number of months before starting to sell your position, and successfully avoid the California FTB. Then again, the FTB may see through this and you may end up tied up in a painful process with the California FTB where they come after you (Yes, they do this). You may be even unluckier, and find that something major happens between now and then, that causes your stock to be worth 25% of what it is now.

If I were you, I would pay the taxes, enjoy the fruits of my labor and move on. I would enjoy the fact that my wealth gives me the ability and freedom to no longer have to contort my life around trying to squeeze more money out for myself and my family.

Good luck!

Topic Author
fluter
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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Wed Oct 16, 2019 11:28 am

Thank you everyone. I really appreciate the thoughtful replies and suggestions. It's especially good to hear experiences from others who have been through similar situations.

If I had $3.3 M in cash I would definitely not put it in a single stock. If there was no tax due, it would be simple decision to cash out and diversify. Given that there is considerable tax due I want to do this as efficiently as possible. But I also vividly remember watching a different employer's stock drop from $20 to $0.06 over the course of a few weeks in the late '90's tech crash. Don't want to do that again!

I was a California resident when I acquired the shares. I may want to move out of CA in a few years, but right now it doesn't fit with the rest of life priorities (though it's certainly tempting given the tax bill). Holding some shares for that future moves feels like a questionable risk/reward trade off.

I already have an appointment with a CPA to discuss some of these options. I am planning to open a DAF with ~$500K, as a few posters have suggested. My thoughts right now are to sell the position over time to get down to <10% of my portfolio. I am looking into the exchange fund idea for part of the position. I don't want to do that will the full position as I think it would leave me too concentrated in stocks (and probably tech stock heavy at that), but I may consider it for a portion.

It's definitely a good problem to have! Thank you again for the advice!

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Wed Oct 16, 2019 11:47 am

bligh wrote:
Wed Oct 16, 2019 11:13 am
fluter wrote:
Tue Oct 15, 2019 11:26 pm
I'd appreciate any thoughts on how you would approach this problem. Would you just sell over time and pay the tax? I have spoken with a couple advisors (fee-only, 1% AUM), who have recommended more exotic strategies such as exchange funds, opportunity zone funds, and covered calls. Up until now I have been a DIY investor following the BH philosophy (and have been happy with that). I'm trying to weigh the pros and cons of just selling and paying the tax versus paying an advisor to help minimize the tax.

Thanks,
Parker
Parker,

Life is a journey with good fortune and bad fortune. It is your good fortune that you were in the right place, at the right time and had the ability and work ethic to earn your windfall. Congratulations! It is your bad fortune that you did it in California, where you will be taxed more than you would like.

If you are choosing to hold on to your stock position to avoid this taxation, you are taking on a massive risk. It is a roll of the dice. You may be able to move out of California, go a good number of months before starting to sell your position, and successfully avoid the California FTB. Then again, the FTB may see through this and you may end up tied up in a painful process with the California FTB where they come after you (Yes, they do this). You may be even unluckier, and find that something major happens between now and then, that causes your stock to be worth 25% of what it is now.

If I were you, I would pay the taxes, enjoy the fruits of my labor and move on. I would enjoy the fact that my wealth gives me the ability and freedom to no longer have to contort my life around trying to squeeze more money out for myself and my family.

Good luck!
+ 1 as to advice.

But don't think 25% of present price. Think 5%. Or 0%.

If you win at the casino, take the money off the table and walk away.

BuddyJet
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Re: How to handle 5M capital gain (post-IPO)

Post by BuddyJet » Wed Oct 16, 2019 11:49 am

I was in a $2M gain position and decided:

Donate some stock to donor advised fund to establish for future giving. Gets full value deduction without gains tax. Look at limits though.

Beyond that, I decided to just pay the tax on gain in one year and invest for the long haul. This won't be seen as the most tax efficient but I made the decision since:

I don't expect tax rates to go down in the future. With my other income, the tax rate does not change if split over two or more years. I looked at OZ and other options but decided that between the lack of transparency, fees and my lack of understanding, I'd rather pay the tax and not have to worry about it. Particularly with the OZ options where the returns, if any, are far in the future and interim valuation is far from objective and there is really no early exit.

BTW, California is very aggressive about going after tax from people moving from California to avoid tax.
People say nothing is impossible. I do nothing all day.

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Wed Oct 16, 2019 11:49 am

gougou wrote:
Wed Oct 16, 2019 11:06 am
fluter wrote:
Tue Oct 15, 2019 11:26 pm
... and covered calls ...
Covered calls is a pretty simple strategy which you can execute all by yourself. For example, the stock price is $100, you could sell call options with strike $120 and earn premiums if the stock does not rise above $120.

You could also purchase protective put options until you've moved to a no tax state.
If I understand covered call writing you give up the upside but retain the downside?

Buying puts is a better idea, but aren't puts only available on a relatively limited number of stocks? I.e. big cap main index stuff, but not many smaller companies?

The only reason to do these things is, in my view, to bridge tax years and possibly achieve a lower tax rate.

Because fundamentally what matters is reducing economic exposure to this single risk asset.

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Wed Oct 16, 2019 11:54 am

fluter wrote:
Wed Oct 16, 2019 11:28 am
Thank you everyone. I really appreciate the thoughtful replies and suggestions. It's especially good to hear experiences from others who have been through similar situations.

If I had $3.3 M in cash I would definitely not put it in a single stock. If there was no tax due, it would be simple decision to cash out and diversify. Given that there is considerable tax due I want to do this as efficiently as possible. But I also vividly remember watching a different employer's stock drop from $20 to $0.06 over the course of a few weeks in the late '90's tech crash. Don't want to do that again!

I was a California resident when I acquired the shares. I may want to move out of CA in a few years, but right now it doesn't fit with the rest of life priorities (though it's certainly tempting given the tax bill). Holding some shares for that future moves feels like a questionable risk/reward trade off.

I already have an appointment with a CPA to discuss some of these options. I am planning to open a DAF with ~$500K, as a few posters have suggested. My thoughts right now are to sell the position over time to get down to <10% of my portfolio. I am looking into the exchange fund idea for part of the position. I don't want to do that will the full position as I think it would leave me too concentrated in stocks (and probably tech stock heavy at that), but I may consider it for a portion.

It's definitely a good problem to have! Thank you again for the advice!
1. you are going to pay California tax. Just accept that. You do not want to waste the next few years of your life in a tax investigation situation, or waiting for The Man to come and tap you on the shoulder and ask for the extra tax.

2. you do not want to wait to sell simply to avoid tax. That's letting the tail wag the dog. With a caveat that if you can split sales over 2 tax years and this is worth doing in terms of tax rate, you can and should (this tax year and next within less than 4 months).

Do not get too cute about this, but rather take money off the table. A life changing amount of money, even net of tax. Then diversify it into a 50/50 bond/ equity index split and be done*. (I might suggest something like 25% TIPS, 30% US Treasury bonds, 45% stocks - as an alternative). Given your tax position there might be a case for high quality California municipal bonds as part of your fixed income position.

A million bucks would change most peoples' lives. Living in California? Maybe that is $2m. $2m lets you buy a house most places (albeit not in Silicon Valley) and pay say $200k each for 2 kids to go to an American private college. Or it sets you up for retirement in 15-20 years (or sooner, on a lower cost of living).

* the US index is heavily tech weighted. Therefore I would suggest global diversification. For example if 45% equities, 30% US equities and 15% non-US, say, or 25%/ 20%.
Last edited by Valuethinker on Wed Oct 16, 2019 11:57 am, edited 1 time in total.

lws
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Re: How to handle 5M capital gain (post-IPO)

Post by lws » Wed Oct 16, 2019 11:55 am

Congratulations on your windfall. Wealth should bring pleasure, not pain. Please make a wise decision and go enjoy life. You have made it.

GT99
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Re: How to handle 5M capital gain (post-IPO)

Post by GT99 » Wed Oct 16, 2019 12:27 pm

EnjoyIt wrote:
Tue Oct 15, 2019 11:50 pm
If I had 3 million in capital gains and had to pay huge amounts of state taxes, I would do everything in my power to legally move to a no tax state for a minimum 184 days of the year. This is especially true if I lived in California and 12.3% of it was to be taxed away.
I don't know anything about CA tax law, but if I could legally do this, I absolutely would (and I have 2 young kids to consider). To me, saving hundreds of thousands of dollars would be worth it (and if I received a $4.8M capital gain right now, I'd retire, so no job to worry about :D ).

EnjoyIt
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Re: How to handle 5M capital gain (post-IPO)

Post by EnjoyIt » Wed Oct 16, 2019 2:21 pm

fluter wrote:
Wed Oct 16, 2019 11:28 am
Thank you everyone. I really appreciate the thoughtful replies and suggestions. It's especially good to hear experiences from others who have been through similar situations.

If I had $3.3 M in cash I would definitely not put it in a single stock. If there was no tax due, it would be simple decision to cash out and diversify. Given that there is considerable tax due I want to do this as efficiently as possible. But I also vividly remember watching a different employer's stock drop from $20 to $0.06 over the course of a few weeks in the late '90's tech crash. Don't want to do that again!

I was a California resident when I acquired the shares. I may want to move out of CA in a few years, but right now it doesn't fit with the rest of life priorities (though it's certainly tempting given the tax bill). Holding some shares for that future moves feels like a questionable risk/reward trade off.

I already have an appointment with a CPA to discuss some of these options. I am planning to open a DAF with ~$500K, as a few posters have suggested. My thoughts right now are to sell the position over time to get down to <10% of my portfolio. I am looking into the exchange fund idea for part of the position. I don't want to do that will the full position as I think it would leave me too concentrated in stocks (and probably tech stock heavy at that), but I may consider it for a portion.

It's definitely a good problem to have! Thank you again for the advice!
Since there is a chance you will be moving in a few years, have you considered fujiters' equity collar idea? It seems like a reasonable way to protect against a loss by giving up any potential gains and then be able to sell the stock in smaller chunks and/or when you move. It may be worth it if it keeps your Ca state tax down as well as keep you out of the 20% capital gains federal tax and the 3.8% obamacare/medicare surtax. A lot of that also depends on your current taxable income

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AerialWombat
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Re: How to handle 5M capital gain (post-IPO)

Post by AerialWombat » Wed Oct 16, 2019 2:38 pm

fluter wrote:
Tue Oct 15, 2019 11:26 pm
(Moving to a lower tax state is not a possibility for the next few years.)
Why not?

You never have to work another day in your life, as long as you manage this money properly. So quit your job and move.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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