This one is less fun. It is time to be brutal.
Go through your stash (which is, hopefully, still on your floor, but otherwise photographs or lists will work) and pull out anything you don't think you'll use and put it in a pile.
- Acrylic from your pre-fiber-snob days? Pile.
- Gifted yarn that's just not your color? Pile.
- Sock weight when you just don't ever really use sock weight? Pile (this one is me. Sigh. I will keep a teensy bit though, for toys and gloves.)
You get the picture.
Now, go through it AGAIN, just in case. Keep knitting friends in mind. Would they enjoy a particular skein more than you? Do they have a birthday coming up? Something to consider.
Next, divide your pile into three categories: Sell, Gift, and Donate. Nice stuff that's in good condition and will fetch a decent price, put into sell. If you can think of a recipient who would enjoy a particular skein, put it in the gift pile (make sure they're not trying to cut back themselves, though.) Anything else goes into donate.
Sell the stuff you've got in a destash sale, either on Ravelry, ebay, etsy, or a physical garage-sale type deal if you've got enough. You're probably not going to get full price for it, but if it's in great condition, you might make back a decent percentage.
Wrap the gift yarn up all pretty and send it on it's way.
Find somewhere to donate the rest of it. Many schools and after-school programs will take it, as well as other creative programs for kids. There are also groups of charity knitters that you might be able to find online who will happily take it. Some LYS's (Abundant Yarn in Portland, for example) have a charity bin where you can donate unloved yarn for someone else to use for charitable purposes. If all else fails, put it up for free on craigslist and make somebody's day.
I cannot stress enough the need to be ruthless, especially if your stash is huge. I know you've paid good money for it, and you'll probably take a loss, but just consider it the price you pay for sanity. Try to only keep as much as you think you can knit in a year, or less if possible.
This is also a great time to frog all those projects you are probably never going to finish. If you haven't touched it in months, let it go, and sort the yarn along with the rest.
As for me, I pulled out all my donate yarn not too long ago (there's a big bag of acrylic lost somewhere in my parents' house, I think, heh..) but I have a neat little stack of stuff that I'll either trade or giveaway in some sort of blog contest...so stay tuned :-)