"Apple employees navigating concentrated stock positions should view strategies like collars as part of a broader wealth and tax planning discussion that requires careful coordination with qualified professionals." – Paul Bergeron, a representative of The Retirement Group, a division of Wealth Enhancement Group.
"Apple employees with significant stock holdings can benefit from understanding how thoughtful planning techniques provide both flexibility and time to make informed decisions about future diversification." – Tyson Mavar, a representative of The Retirement Group, a division of Wealth Enhancement Group.
In this article we will discuss:
How an options collar can help manage concentrated stock positions without triggering immediate taxes
Key considerations for constructive sale treatment under Section 1259
Practical examples and alternatives for Apple employees holding appreciated stock
By Wealth Enhancement Group's Tyson Mavar
The Difficulty of Keeping Valuable Stock
Many Apple employees hold highly valued company stock, which may have been built up over years of employment or from investments that performed better than expected. Leaving these shares without a hedge exposes them to downside risk if the stock price falls, but selling would create a significant capital gains tax liability.
One method of limiting potential losses without selling outright is an options collar. Even if the stock is not sold, certain hedging techniques can be treated as taxable sales under Section 1259 of the Internal Revenue Code, which governs "constructive sales."
The Operation of an Options Collar
A collar strategy combines shares already owned with two option positions:
Put option: Purchasing a put option gives the right to sell shares at a set strike price. For example, if you own stock at $100 and buy a $90 put, you can still sell at $90 even if the price falls further.
Covered call: Selling a call requires selling at a higher strike price. For instance, selling a $120 call limits gains above $120.
When paired together, the call premium can offset the put’s cost. This creates a range where downside is limited, upside is capped, and with careful planning, the collar can often be cost-neutral.
The Use of Collars by Investors
Apple stockholders and others commonly use collars in three cases:
Concentrated positions: A large portion of wealth tied to one company.
Market uncertainty: When downside management is needed but selling isn’t desirable.
Estate and legacy planning: Preserving value while postponing capital gains.
The Problem of Constructive Sales
Section 1259 defines some hedges as constructive sales, including:
- Short sales of stock you already own.
- Contracts for future delivery of the stock.
- Deep in-the-money calls and puts that eliminate both risk and reward.
If the IRS views a collar as removing nearly all economic exposure, it can be treated as a constructive sale, triggering immediate recognition of capital gains.
Collar Design to Steer Clear of Constructive Sales
To reduce the risk of Section 1259 issues, Apple employees can structure collars with careful attention:
- Keep strike prices wide enough to allow both risk and reward.
- Use out-of-the-money calls and puts rather than in-the-money options.
- Roll collars forward instead of holding outdated positions.
- Document investment intent with an advisor.
An Example of a Case
Suppose you hold $2 million in stock purchased years ago for $200,000. Selling outright could result in over $400,000 in federal taxes, depending on your state.
Instead, you might sell calls at 120% of the stock’s value and purchase puts at 80%. In this design:
- Losses are limited to 20%.
- Gains are capped above 120%.
- The position retains risk and reward, so it generally avoids being classified as a constructive sale.
- This approach can provide time to manage sales across multiple tax years or wait for a more favorable tax environment.
Realistic Aspects
Apple employees considering collars should note:
Liquidity: Large-cap companies usually have strong options markets.
Rolling: Positions can be extended as expiration approaches.
Alternatives: Other hedging tools include donor-advised funds, charitable remainder trusts, gifting strategies, or exchange funds.
Advisory guidance: Given the complexity of constructive sale rules, consulting tax and legal professionals is critical.
The Bottom Line
Options collars can help Apple employees preserve the value of appreciated stock while limiting downside and postponing taxable events. This strategy allows time for thoughtful diversification while maintaining both risk and opportunity. However, collars must be carefully designed to reduce the chance of triggering constructive sale treatment under the Internal Revenue Code.
Disclaimer: This material is for educational purposes only. Options involve risk and are not suitable for all investors. Always consult your tax professional before making decisions, as tax laws are complex and subject to change.
Sources:
1. United States Congress. 26 U.S. Code §1259 - Constructive Sales Treatment for Appreciated Financial Positions. Cornell Law School, Legal Information Institute, 5 Aug. 1997, amended 4 Oct. 2004. https://www.law.cornell.edu/uscode/text/26/1259.
2. Internal Revenue Service. Revenue Ruling 2003-7, 2003-1 C.B. 363. 2003. https://www.irs.gov/pub/irs-drop/rr-03-7.pdf.
3. Cboe Global Indices, LLC. Cboe Collar Indexes (CLL, CLL1M, CLL3M) Methodology. 14 Oct. 2024. https://cdn.cboe.com/resources/indexes/Cboe-Collar-Indexes-Methodology.pdf.
4. Options Industry Council (OIC). Options Strategies Quick Guide. The Options Clearing Corporation, 2021. https://www.theocc.com/getmedia/fdd067fd-8de2-4c3e-bd40-053f89c75592/OIC-Quick-Guide-2021.pdf.
5. Internal Revenue Service. 2024 Instructions for Form 5227, Split-Interest Trust Information Return. 26 Nov. 2024. https://www.irs.gov/pub/irs-pdf/i5227.pdf