AN individual who owns a sizable block of stock in a public corporation, and who has had the pleasure of watching that stock appreciate in value over a period of years, frequently feels a need to diversify his holdings. The decision to diversify would normally involve a sale of the appreciated stock for cash and a reinvestment of the proceeds. However, a sale for cash will occasion the imposition of a capital gains tax equal at the maximum to 25% of the gain realized, whereas no tax is imposed if the securities are simply retained. Since there is thus a difference in tax cost between selling and retaining an appreciated asset, the investor wishing to diversify is obliged to take the tax penalty into account and to consider whether the benefits of diversification are really worth a substantial reduction in his personal wealth. The question is presumably a difficult one, and the investor\u27s reluctance to suffer an immediate and highly visible impairment of capital may ultimately lead to the abandonment of what otherwise would commend itself as a sound personal investment goal
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