Kater...hello. I would remove the stone altogether and install something that is not as wide and that perhaps goes all the way up to the ceiling or if you want something more traditional, then remove stone and add mantel surround. I agree with you that the proportions are wrong.

This really depends on if you want to keep your current fireplace or not. If you like the stone, then you might be stuck with it's height and colors (unless you paint the stone) and will have to work around it. If you don't mind removing/replacing/covering it, then the sky's the limit, literally.

Without knowing your desires about the current fireplace, I like the idea of covering it and using a different material like stacked stone or tile and I would build it out to go to the ceiling. If you want a focal point, take it to the ceiling (especially in a 2-story room like yours) would make a HUGE statement. You can do a simple mantle at normal height with a weathered 4x4 post or something like that to bring in some simple warmth but will look great with stacked stone and your current color palette.

With the fact the current fireplace is wider than the opening between your windows, you could either taper the additional height with a straight taper (second section would just be stood on top of the current section) or adding a sloped taper. The other option would be to cut the width of the current base down to be the width you want all the way up.

Just my initial thoughts.

Few different ideas and styles
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Hi Liza, We work in the same area.. I've been faux finishing for 25 years. Check out my website www.mrfaux.com

I would not take the fireplace to the ceiling. Area is too small for that massive look and the windows would not work with that either. A wood mantle at a lower height would look good and add a focal point to that area. You could take out the extra stone or put the mantle on the stone at the proper height.

Hi Kater. Would you consider something like this?

The picture is Three Palms Oasis by Carol Leigh, on http://fineartamerica.com/art/all/all/canvas+prints?page=2. It may not be to your taste, but I'm posting it separately because I think it's rather lovely and the colours are perfect with the stone.

If the fireplace were mine I'd find a way to keep the stone, but probably risk faux painting that single black stone, which attracts way too much attention to itself.

I think extending the stone on either side would help to give width to this narrow room. I would take some stone down from the top, and add a beefy wood mantle.

You can probably extend it towards the wall for a prominent effect. Something like the image below.

I would get a heavy mantle. You have a cute space to work with there, you won't need to over-do it.

I think a mantle is the easiest solution -- it would break up the huge expanse of stone. Why not tape some paper or cardboard up there to give you an idea of how it might look?

I'd like to see what you decided - post a photo when you get a chance!