Planning a major exit this year, whether it’s a business, property, or concentrated stock sale? A large gain can bring a large tax bill along with it, and many people do not realize there are strategies designed specifically to soften that impact. One approach worth understanding is long/short direct indexing.
What Long/Short Direct Indexing Is
Long/short direct indexing is a strategy widely used by institutional investors that is becoming more accessible to individuals. Instead of buying a standard index fund, this approach purchases the underlying positions directly, with a short overlay layered on top. That structure allows the strategy to generate losses even while broadly tracking the market.
How It Offsets a Major Sale
Those losses can be used to offset gains from a major sale, whether that sale is a business, a piece of property, or a concentrated stock position. Rather than a single one-time event, the strategy can generate losses that accumulate throughout the year or roll forward into future years, depending on individual circumstances. In effect, it turns ordinary market volatility into meaningful tax savings, using the ups and downs that would otherwise go unnoticed in a standard index fund.
Why Timing Matters
The value of this strategy is closely tied to timing. Setting it up well ahead of a major sale gives the portfolio more time to generate offsetting losses, and it allows those losses to be harvested in a way that lines up with when the gain will actually be recognized. Waiting until after a sale has already closed limits how much benefit the strategy can provide.
Why It’s Worth a Conversation
Not every major exit calls for this approach, and it works best as part of a broader tax and investment plan rather than as a standalone fix. But for individuals facing a significant gain this year, it is a strategy worth understanding and discussing well before the sale is finalized.
Is a major exit on the horizon for you this year? Want help understanding your options? Contact us today to schedule a complimentary Q&A with one of our team members.
