279 | 5 Strategies to Minimize Capital Gains Tax (and Keep Your Portfolio Growing) in 2025

[00:00:33] Hilary Hendershott: Welcome back to Love, Your Money^®! I’m Hilary Hendershott, and today we’re talking about a topic every investor needs to understand, and that is how to minimize capital gains taxes in 2025.

[00:00:45] If you’re investing wisely, which I’m sure if you’re listening to this show you are, and you have taxable investments such as a business, a piece of real estate, and especially stock market investments that are in an individual or brokerage account, hopefully your portfolio has grown. Maybe it’s shrunk a little over the last few days, but grown overall. And that also means the IRS wants a piece of your success.

[00:01:10] Proactive tax planning is so important because capital gains taxes can be punitive. Especially if you live in a high-tax state where you have to add that tax rate to the federal one, you’re talking about potentially lopping off 20%, 30%, or more of your investment growth, and that is painful.

[00:01:29] The good news is there are smart, strategic ways to reduce the tax drag on your investments and keep more of your hard-earned money working for you.

[00:01:37] I’ve been in this industry for 25 years now, and I’ve seen investors do all kinds of things to avoid capital gains taxes. At the top of the list of the least sophisticated strategies is simple tax deferral. If you just never sell, you don’t have to pay capital gains taxes.

[00:01:54] The lovely thing about this strategy is, you know, I said it was unsophisticated but it’s actually pretty effective, you owe $0 in tax. The ridiculous thing about this strategy is you never, ever get to spend your hard-earned money. So, people live for years with an undiversified, unmanaged investment portfolio, including stocks and often real estate. And at some point, their default strategy becomes just to die with the investment because their heirs will owe zero taxes on it. You may already know about that. I’ll talk more about that, which is called the step-up in basis later in this episode. And hooray for your heirs, but too bad for you if you never get to spend a dollar of the money you spent your time and energy earning.

[00:02:38] Another tax avoidance strategy I’ve never quite been able to understand is investing in underperforming assets because at some point you’ll get tax-free earnings on it. These can include but are not limited to Opportunity Zones, oil & gas investments, and even in some cases purchasing bare land.

[00:02:54] I’m never a fan of a strategy with low returns because if you earn more than 2% or 3% less than a diversified stock portfolio would have, you’ve essentially cost yourself 100% of the potential tax savings or more so you end up worse off. Not only that, but most of these investments have really long lockup periods where you can’t get to your money. In my experience, that can be annoying, but it can also be really painful if you find yourself in an unexpected circumstance where you need the cash but can’t get to it because it’s locked up.

[00:03:26] So, the strategies I’ve always leaned into involve what investors do love, and that’s earning consistent investment returns over the long run while legally minimizing the portion that they end up paying to Uncle Sam.

[00:03:39] Assuming you’re interested in high returns and you want to keep your money growing efficiently, this episode is for you. Let’s get into it.

[00:03:47] First, we’re talking about tax loss harvesting and tax-conscious investment vehicles. Starting with the basics. Because if you’re not doing these, it’s time to level up your financial game. Most investors know about tax loss harvesting, and some of you even have digital investment platforms doing this for you automatically behind the scenes. I talked about tax loss harvesting in Episode 234 of the podcast, but I’ll describe it here just so we’re all on the same page.

[00:04:13] Tax loss harvesting is one of the most common and effective strategies to reduce capital gains tax. This involves selling investments that have lost value to offset the gains from your profitable investments. The result, ideally, is a lower overall tax bill, but it’s important to manage this process wisely so you don’t lose out on market growth while you wait for the next opportunity. Here’s how it works.

[00:04:38] Let’s say you sold a stock position that was up by $50,000, so then, assuming a 30% total tax rate, you would owe $15,000 in capital gains taxes, but you also have another position that’s down $30,000. If you also sell that position, you offset $30,000 of your gains, so you’re now only showing gains of $20,000. Your tax bill is lower to only $6,000 and an extra $9,000 stays in your pocket.

[00:05:09] Even better, if your capital losses exceed your capital gains in the year you harvest the losses, you can use up to $3,000 per year to offset other taxable income, including wage income while any remaining losses can be carried forward to future years. Those carry-forward capital losses can cancel capital gains in future years, or you can continue to use them to offset other types of income at the rate of $3,000 per year.

[00:05:35] So, just to reiterate, losses can be used to offset gains incurred during the same tax year as when the losses were harvested and they could be carried forward to offset capital gains in future years. They never lose their effectiveness and they can offset up to $3,000 of ordinary income each year.

[00:05:54] But what do you do with the proceeds at the harvested losses once they’re in cash? Well, you definitely don’t want to leave your hard-earned money sitting on the sidelines because you never know when regrowth will occur. You don’t want to lose out on surprise market rallies, in other words.

[00:06:06] So, you might be thinking, “Just sell the stock on Monday to harvest the losses and buy it back on Tuesday.” But the IRS doesn’t like that. If you bought back the same investment on Tuesday, you would violate a rule called the Wash Sale Rule.

[00:06:18] The Wash Sale Rule says you can’t buy back the same security or even a “substantially identical security” within 30 days of the original sale. Technically, a wash sale has a 60-day window because it includes trades completed 30 days before the loss harvesting transaction and 30 days after. And the wash sale rule takes account of all trades under the investors or the couple’s social security numbers, including even in IRAs that are titled to you or your spouse.

[00:06:46] Wash sales are not illegal but if you violate that rule, you won’t be able to use the losses harvested in a wash sale to cancel out gains. So, you definitely want to understand how to avoid it.

[00:06:58] I can’t tell you exactly how to avoid the Wash Sale Rule though because there are too many stocks and mutual funds in the world to even list. Also, the IRS is intentionally vague on the definition of exactly what a “substantially identical investment” would be, so that will depend on the specifics of your transaction. Your financial advisor should have a lot of experience on this and really know how to avoid wash sales, and potentially your custodian could do the same.

[00:07:24] So, you sell the investments that were at a loss position on Monday, as before, and you buy back into the market using investments that are substantially different from the ones you sold, and you don’t violate the Wash Sale Rule on Tuesday. Then after 30 days have passed, you can sell the “substantially different investments” and buy back into the original investment if you like.

[00:07:44] So, once you’ve harvested losses, you need to make sure you report them on your tax return. If you go to the trouble of doing tax loss harvesting–as you should–but those transactions don’t make it onto your tax return, you’ve totally wasted your time and effort. Also, you need to ensure your tax preparer is continuing to report unused losses referred to as “loss carry forwards” on every subsequent tax return until they’re used. Otherwise, you lose them. My team and I double-check every one of our clients’ tax returns, and this is probably the most common error. Tax preparers often forget to carry forward losses from previous years, which can be a really expensive mistake.

[00:08:24] Tax-conscious investment vehicles are another essential tool and something we definitely use in client accounts. There are specialized tax-managed mutual funds that minimize turnover within the account and therefore minimize capital gains taxes. Mutual funds are required to distribute internal capital gains to their underlying shareholders. So, generally, the less trading the mutual fund manager does, the fewer taxes the underlying investor has to pay. Generally, these types of specialized mutual funds are referred to, as I said, as “tax-managed.”

[00:08:57] ETFs can also be a great tax minimization vehicle. As you probably know, they have a structural advantage that allows holders to individually defer capital gains taxation, but ETFs only allow tax deferral, not tax avoidance, because eventually, you have to pay the tax.

[00:09:13] I think you’re starting to see here that especially if you have taxable investments– those are investments outside your 401(k) or IRA–your overall wealth is impacted by a variety of factors. It takes knowledge, skill, and wisdom to implement these strategies. And if you’d like these strategies working for you, you can choose to work with an investment advisor with tax awareness and expertise who understands how to keep more of your money in your pocket.

[00:09:37] Again, tax loss harvesting and tax-aware funds really are the bare minimum if you have significant wealth in taxable accounts. So, let’s talk about a few of the sophisticated strategies, including how they compare to some of the other options available to you.

[00:09:52] The next strategy is one that many investors overlook, and that’s borrowing against appreciated stock instead of selling it. When you sell a stock that has increased in value, as you know, you trigger capital gains tax. However, borrowing against your holdings allows you to access cash without triggering a taxable event.

[00:10:09] Instead of selling a stock and incurring taxes, high net-worth investors can take out a reasonable-cost loan using their stock as collateral. This allows you to access liquidity while your investments continue to grow. This is, sometimes, a little bit morosely, referred to as the “buy, borrow, die” strategy, and that’s not the only reason I don’t exactly adore this particular strategy so I’m hoping it’s not the only arrow in your quiver.

[00:10:37] But here’s how it works. Let’s say you own a million dollars of a single stock that you purchased for $250,000. If you sell it, you could face a massive tax bill, in some cases up to $250,000 or more.

[00:10:50] Instead of selling and paying capital gains tax, you can, if your custodian allows it, take out a loan using your stock as collateral, allowing you to access cash without triggering a tax liability. This strategy is especially useful for high-net-worth individuals looking to fund expenses without liquidating their portfolio.

[00:11:08] A conservative investing mindset would only allow you to use this strategy to fund short-term cash needs. In other words, it’s like a bridge loan. Clearly, you wouldn’t plan to float yourself on debt forever.

[00:11:24] So, in conclusion, if you need liquidity but don’t want to sell assets and incur taxes, borrowing against your portfolio could be an excellent solution.

[00:11:33] But this strategy has, for good reason, become less attractive as interest rates have gone up. Borrowing against depreciated assets got popular when interest rates were super low, and those loans generally charged around 4%. The rate was probably higher for smaller retail clients and lower for professional investors. Today, interest rates on those loans have doubled or more making it a pretty expensive proposition.

[00:11:59] Also, I mentioned that some refer to this strategy as the “buy, borrow, die” strategy. For the die portion, you should be aware that your heirs will receive a full step-up in basis when you die. That means if you leave this $1 million portfolio to your children, instead of owing capital gains taxes on $750,000 of gains, they won’t owe a penny on the value of the portfolio the day you die. Instead, they start amassing taxable gains after that.

[00:12:29] If this is your only tax avoidance strategy, of course, you’ll never be able to diversify your concentrated portfolio. You’re just borrowing against it, leaving you–in some cases–far overexposed to the stock of just one or a few companies. For these reasons, while security-backed loans may have their place in some financial plans, I’ve never really thought of this particular strategy as a huge winner.

[00:12:51] Third, we’re talking about stock collars, and that means we’re protecting gains without selling. So, if you hold highly appreciated stocks, but don’t want to sell and realize capital gains, stock collars might be a great strategy. Yep. I said collar, and it’s spelled C-O-L-L-A-R. But it’s not the kind you put on your dog, Spot. In the sense that a collar attached to a leash can keep your pet within a few feet of you, though, a stock collar can keep your portfolio values within a few dollars of where they are now.

[00:13:21] A stock collar is an option strategy where you buy a protective put option and sell a call option, effectively locking in a price range for your stock without selling it and realizing gains. Like most option strategies, collars are a little complicated, so I’ll walk you through an example.

[00:13:38] Suppose it’s early March 2025. The S&P 500 ETF, the ticker for that is SPY, is trading around $580, which is down from its recent high of $613, and you’re concerned it might fall further. But you bought your SPY shares 15 years ago at $120 so selling would trigger a large capital gains tax. What do you do?

[00:14:03] Enter the collar, and we are using actual option prices from early March of 2025 in this example. You buy put options on SPY for $15.50. That’s 15 dollars and 50 cents. These give you the right to sell your SPY position at $570 on June 30th. So, now if SPY falls further than $570, you’re protected because you have this contract that says you can sell at $570. At the same time, you sell call options. That gives someone else the right to buy your SPY position at $600. That call option nets you $15.50 in proceeds, and that covers the cost of the put option.

[00:14:45] So, you’re net zero on costs and your SPY positions value is largely frozen through June. It can’t fall more than 1.72% because you have the right to sell for $570, and it can’t rise more than 3.45% because you gave someone else the right to buy it for $600. As always, you can check our calculations either in the show notes for today’s episode or below this video, depending on where you watch it.

[00:15:09] Likely, the reasons you would consider a collar are obvious. If your stock has seen significant gains but you don’t want to sell and trigger a taxable event, a stock collar provides a low-cost hedge against downside risk while keeping your position intact. And, to reiterate, buying a protective put creates a safety net in case the stock price drops while selling a call generates income to offset the cost of the put.

[00:13:32] So, for those who are deeply concerned about short-term losses, stock collars can protect gains without forcing a taxable event. However, this strategy isn’t a panacea for avoiding taxes either. The point of deferring taxes is to extend the period over which you can benefit from compounding returns. The collar, because it offers only a brief period of protection, doesn’t do this.

[00:15:55] Collars sacrifice the upside on a stock to avoid the downside. And this can make sense in a few specific circumstances–say, you want to make sure to move the gain from this tax year to next tax year–but eventually, you’re either going to have to sell the stock using the put option to avoid a loss or using the call option as the buyer cashes in on his or her gains, and at that point, you owe taxes.

[00:16:20] The big investment houses love offering their clients collars. “Protect your gains without taxes at zero cost. Amazing value, right?” Actually, not so much. Zero cost is an illusion. There is no free lunch. Option trades are expensive. For example, did your banker mention that he’s getting a commission on both the call and put trades? And if the collar is continually refreshed, these costs add up fast, as do the odds that the underlying position gets sold as part of the collar triggering the capital gain you’re supposed to be avoiding. So, just to reiterate, not a panacea.

[00:17:00] A better strategy if you want to avoid losses and are willing to give up future gains is almost always just sell the damn stock.

[00:17:09] All right. The fourth option we’re going to talk about today for minimizing capital gains taxes is direct indexing. Direct indexing was a game changer for high-net-worth investors. Instead of buying a basket of stocks using a single ETF from a mutual fund, direct indexing allows you to own the individual stocks within an index. Why does this help with taxes?

[00:17:29] Well, you get tax loss harvesting at the stock level. Because you own individual stocks, you can selectively sell underperforming stocks to capture losses and offset gains more efficiently.

[00:17:40] You also get customization. You can exclude stocks or sectors that don’t align with your values or investment goals.

[00:17:47] And you get control over gains realization. Unlike most index funds and ETFs where you have no control over when gains are realized, direct indexing allows you to strategically manage taxable events over time.

[00:18:01] This strategy used to be available only to ultra-wealthy investors, but thanks to advances in technology, it’s becoming more and more accessible.

[00:18:09] Considerations for direct indexing include the fact that direct indexing generally creates significant tax benefits the first year you’re invested in the DI fund. And then those benefits rapidly fall to zero over the next couple of years.

[00:18:23] Think about it, you start with the 500 stocks in the S&P 500. Over time, you sell the stocks that go down, which means the stocks you’ve held onto are up. As that portfolio increasingly starts to consist of progressively more and more appreciated stock, pretty soon there are no losses to harvest, which equals no more tax benefits.

[00:18:46] And now you’re a bit stuck in the fund. Of course, you can take your money out any time, but doing so triggers capital gains on those remaining appreciated shares, and all the taxes come due.

[00:18:57] All right. Let’s take stock. No pun intended. So far, dear listener, we’ve talked about four of the five strategies I promised you today. The next one is by far the most exciting. First, we’re going to talk about one to four–just, we’re summarizing what we’ve already talked about. Those are, one, tax loss harvesting and tax-managed funds, including ETFs; two, borrowing against appreciated stock; three, stock collars; and four, direct indexing. We’ve talked about how each of these can help reduce capital gains taxes but also have weaknesses. So far, nothing hits it out of the park. In some cases, when it comes to avoiding capital gains taxes, these strategies offer only temporary reprieve, but no real solution.

[00:19:41] Some of their flaws include temporary protections–but the real and so far unavoidable weakness is the strength of the stock market. Simply put, the stock market just goes up far more than it goes down. And while that’s what we like to see, it also means gains in most portfolios are inevitable. And when you sell a stock that’s in a gain position, you owe taxes. Unless you’re dead.

[00:20:04] What you really need, in order to meaningfully reduce capital gains taxes, is a way to amass gains in your portfolio while you amass losses that can cancel out the gains, but that don’t reduce your portfolio returns. In other words, you want to have your cake and eat it too. And we want that for you. A strategy that allows you to do exactly what I’m talking about is what I’m going to talk about next.

[00:20:33] For high net-worth investors, there are some very unique and very valuable Separately Managed Accounts that take tax efficiency to the next level. These are customized accounts managed by professionals with experience in tax-aware investment strategies.

[00:20:48] Here at Hendershott Wealth, we’ve started combining the SMA offer with savvy financial and tax planning and our in trademark application for the phrase, Ultra Tax Efficient Wealth Management^SM. Here are some of the key advantages of Ultra Tax Efficient Wealth Management^SM and these kinds of SMAs.

[00:21:07] First, tax deferral maximizes compound returns. As we talked about before, delaying capital gains taxes allows more money to stay invested, leveraging compound returns over time. Over long periods, deferred taxes begin to resemble no taxes at all, significantly boosting portfolio value. If inherited, assets benefit from a step-up in basis, eliminating capital gains taxes altogether.

[00:21:34] Second, the market-neutral approach creates the right kind of losses: the kind that don’t lower your net worth. I’ll be describing market neutral soon, that term, but when it comes to investments, portfolio losses are bad, but tax losses are good. And Ultra Tax Efficient Wealth Management^SM is designed to maximize the good kind while minimizing the bad kind. Remember, you’re going to get to have your cake and eat it too.

[00:22:00] Third, this kind of strategy allows you to reliably accumulate tax losses in all markets. Unlike traditional tax loss harvesting, which depends on market downturns, Ultra Tax Efficient Wealth Management^SM gives you tax benefits even in rising markets. Unlike direct indexing, the strategy uses a sophisticated long-short overlay calculated to ensure reliable tax losses indefinitely, regardless of market direction, and without generating portfolio losses.

[00:22:26] Fourth, you maintain access to your money. Because Ultra Tax Efficient Wealth Management^SM provides an ongoing stream of realized losses indefinitely, my team and I can create a spending plan for you. For example, in retirement, that doesn’t trigger capital gains taxes. You can’t access all of your money without paying taxes, but reasonable distribution ratios are absolutely possible. And of course, you can always access your money. You just have to pay taxes if you don’t follow the plan.

[00:22:54] Fifth, you can finely unwind large and sometimes massive positions of company stock. Investors with large concentrated stock positions, the kind that are common in Silicon Valley when an employer’s stock price takes off, can strategically rebalance their portfolios without incurring significant taxes. This allows for a smooth, low-cost transition to a diversified portfolio, and that’s a really important step in a sophisticated investor’s life. For more tips about diversifying concentrated holdings, check out Episode 277, Diversifying Employer Stock.

[00:23:28] Finally, last point on Ultra Tax Efficient Wealth Management^SM, it can be used to minimize taxes on multiple asset types. This strategy provides significant benefits not only for stock portfolios but also for business owners and real estate investors looking to minimize taxes on major asset sales.

[00:23:45] Now, I’ve talked openly about the downsides of each of the strategies I mentioned today. So, I’d be remiss if I didn’t say, of course, Ultra Tax Efficient Wealth Management^SM really is only appropriate for what we’re calling “suitable investors”, and those are investors that have or expect to have large unrealized capital gains outside of retirement accounts. And I do mean large. The separate account manager has a seven-figure minimum for this strategy and multiple seven-figures for the styles that can generate losses faster.

[00:24:14] There really is so much more to cover when it comes to this wealth management approach, and I don’t want to shortchange you by trying to cram it all into the end of this podcast episode, but I will say this:

[00:24:24] This level of tax efficiency is a hallmark of sophisticated wealth management, and if you’re not leveraging it, you may be leaving piles of money on the table.

[00:24:34] I’m going to cover this approach in much more detail in the next few episodes of the podcast, and I’ll be joined by Robert Hendershott, my husband, and Hendershott Wealth Management’s new Chief Investment Officer. Ultra Tax Efficient Wealth Management^SM and utilizing Separately Managed Accounts offer an incredible wealth-building opportunity, and we want to make sure to do the topic justice. So, look out for Episodes 280 and 281 as they’re published in the coming weeks. And if you don’t want to wait, we also published an article on our website at HendershottWealth.com. Just head to the Resources tab and look under Articles. It’ll also be linked to in the show notes beneath today’s episode.

[00:25:12] Suffice it to say, Ultra Tax Efficient Wealth Management^SM is a powerful and potentially very profitable option for high net-worth investors with large expected capital gains who are looking to build wealth.

[00:25:25] All right. Here are some closing thoughts on today’s topic. Today, we’ve talked about five key strategies that are popular and in use now to minimize capital gains taxes in 2025. You also got my thoughts about them. Today, we talked about tax loss harvesting and tax-conscious investment vehicles; borrowing against appreciated stock to access cash without selling, but of course, beware the cost; stock collars for temporarily protecting gains without selling; direct indexing for increased tax efficiency but with benefits that are concentrated in and often limited to the first few years of the DI strategy; and finally, specialized Separately Managed Accounts and Ultra Tax Efficient Wealth Management^SM.

[00:26:08] Remember, the key to building wealth isn’t just making money, it’s keeping more of what you earn. Capital gains taxes are a drag on everyone’s portfolio but there are ways, some extraordinarily powerful, to minimize this drag.

[00:26:22] These strategies can be complex and are not suitable for all investors, but the right financial advisor can help you find the ones that fit your situation and implement them seamlessly so you don’t have to stress about it.

[00:26:34] At Hendershott Wealth Management, we specialize in helping investors like you keep more of your money while growing your wealth in the smartest way possible. Schedule a complimentary meeting with myself or one of my team members today at HendershottWealth.com/contact to find out how we can optimize your portfolio for tax efficiency.

[00:26:53] Thank you for tuning in to Love, your Money^®! Don’t forget to subscribe and share this episode with someone who needs to hear it. Until next time, stay smart, stay strategic, and love your money so it can love you back.