The High-Net-Worth Secret to Selling Big Winners Without Taking Big Tax Hits

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Quite a few readers have told me that they own single stocks or funds with significant capital gains built up. They want to reduce their exposure to mega-cap stocks but are worried about triggering a large tax bill.

This is a common issue many investors are experiencing today. There are several ways to handle it, but today I want to share a lesser-known strategy used by high-net-worth individuals — and one of my favorite strategies to reduce or even eliminate this problem.

This strategy is called "Long/Short Tax Management Overlay." It may sound complicated, but it’s actually quite straightforward. I’ll break it down. But before I do, I want to emphasize the importance of reducing concentrated stock positions.

Take Profits on Big Gains and Avoid Losing a Fortune

I’ve seen clients lose fortunes because they were trying to avoid taxes and would not take advice to diversify during a crazy bull market.

Recently, many investors in Oracle (ORCL) , Veeva (VEEV) , Workday (WDAY) and Twilio (TWLO) have been badly hurt because they didn’t reduce exposure and diversify into better opportunities. Based on my analysis, I believe there could be more casualties around the corner if this isn’t addressed.

That’s why I’m writing this now. In fact, I recently sent a note to clients emphasizing that now is the time to add funds to brokerage accounts so they have cash available to take advantage of opportunities if volatility continues to rise.

A single bad earnings report, industry shift or market correction can wipe out years of progress in a short period of time. And if your shares are subject to lockups or liquidity constraints, it may be difficult to exit in an orderly way.

The toughest part is that selling to diversify usually triggers a large capital gains tax bill— often 20% to 40% or more of your profits.

One of My Favorite Tools to Avoid Taxes

This is one of my favorite tools for investors facing exactly this problem. It allows you to use your appreciated shares as collateral to build a specialized portfolio that intentionally generates tax losses.

You stay fully invested the entire time and reduce your concentration gradually instead of all at once. It gives you control over both risk and taxes.

How the Strategy Works

You fund a separately managed account using your concentrated stock as collateral. The manager builds a leveraged portfolio — typically buying about 30% of the portfolio value in stocks expected to perform well in the short term, while shorting a similar amount in stocks expected to underperform.

Your net market exposure remains around 100%, so you continue to participate in market upside.

This structure creates significantly more opportunities to harvest tax losses in both rising and falling markets. If the market moves up, you can harvest losses from your short positions. Conversely, if the market declines, you can harvest losses from your long positions.

These long and short positions are continuously replaced using a sophisticated algorithm designed to avoid wash sales, emphasize stronger companies on the long side and weaker companies on the short side, and generate alpha from the net long/short overlay.

These losses are harvested systematically and used to offset gains as you gradually sell portions of your original concentrated position.

See it in Action

Let’s assume you own (NVDA) and have roughly $1 million in a concentrated position with a very low cost basis after years of strong performance. You still like the company, but you’re losing sleep over the level of risk.

You can implement a Long/Short Concentrated Stock Position Strategy using your NVDA shares as collateral. Your then build a portfolio with approximately $300,000 in long positions and $300,000 in short positions.

Over time, the account generates meaningful tax losses. These losses allow you to sell portions of your NVDA position gradually. After several years, your wealth is spread across a more diversified portfolio, your risk is significantly reduced, and you retain more of your gains.

Your tax bill is substantially reduced — or potentially eliminated — depending on how you execute the exit. And this is done typically a lot faster than traditional tax loss harvesting.

The Real Freedom This Strategy Delivers

This approach puts you back in control. You avoid the all-or-nothing decision between maintaining a risky concentration or paying a large tax bill upfront.

You stay invested and diversify in better opportunities more quickly and reduce risk more efficiently than with traditional tax-loss harvesting alone.

For anyone sitting on large, concentrated positions, this is a practical way to protect the wealth you’ve worked hard to build.

Reduce Your Concentration Risk the Smart Way?

Would you rather take the tax hit all at once or manage it intelligently while reducing risk?

Drop your thoughts in the comments. I read every one and respond to as many as I can.

Note: This strategy involves the use of leverage, short selling and tax-loss harvesting, and is not suitable for all investors. Outcomes will vary based on individual circumstances, market conditions, and implementation. Tax considerations are complex, and investors should consult with their tax advisor and financial professional before pursuing any strategy. Past results are not indicative of future performance.