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Selling a business, investment property, appreciated stock or even your primary residence can leave you with a huge tax bill.
In 2026, federal long-term capital gains are taxed at 0%, 15% or 20% depending on your income, plus an extra 3.8% net investment income tax (NIIT) for high earners.
This means sellers of large assets could owe up to 23.8% federal tax on their gains. On top of that, state taxes apply.
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Utah, for example, taxes capital gains at the flat tax rate 4.55%. Washington state, which has no general income tax, recently introduced a 9.9% tax on large capital gains above $1 million. All told, you could owe 25% to 35% of your profit to taxes.
For instance, selling a business for $6 million could easily trigger $1.5 million to $2 million in combined federal and state taxes once these rates are applied.
Even selling a primary home has tax implications: Yes, there’s a special $500,000 federal exclusion for married homeowners ($250,000 exclusion for a single person), but a gain beyond that would face hefty capital gains taxes.
It’s not uncommon to see significant gains well above the primary residence home exclusion in places like Washington, California, Oregon and Utah, where real estate prices have soared.
Fortunately, there are tax-smart strategies to help reduce or defer these taxes so you keep more of your money.
Direct indexing: Offsetting gains with losses
One strategy for those expecting a big gain — from a business, real estate or stock sale — is called direct indexing. Direct indexing means buying a basket of individual stocks of an index (for example, the S&P 500) in a separately managed account, rather than a single ETF or mutual fund.
Why do this? Because it lets you apply tax-loss harvesting in a more targeted way. With hundreds of stock positions, you are bound to have individual stocks increase and decrease in value from day to day.
When a stock goes down in value, we intentionally sell that loser. You heard that right — sell intentionally to create losses.
The strategy also navigates the 30-day wash-sale rule and aims to keep overall account performance returns on pace with the index it follows — in line with the S&P 500 performance, for example. The realized losses can then offset your capital gains dollar-for-dollar.
In simple terms, you’re using stock market losses to cancel out the taxes on your big sale.
An example of how it works
Say you know you are going to sell your company, stock, a primary residence or investment real estate and will have a large gain. By harvesting, say, $100,000 of losses in a direct-indexed portfolio, you could wipe out $100,000 of taxable gains from the sale.
And if you get on this strategy early — say, a few years prior to the sale — you could accumulate more losses leading to the sale.
When done right, direct indexing can significantly reduce your tax bill. It’s a way to be proactive about your taxes by using smart, active investment strategies. In short, harvesting losses via direct indexing turns the market’s ups and downs to your tax advantage.
Plan ahead and get advice
Selling a major asset doesn’t have to result in a massive tax hit. By using direct indexing within your non-qualified investment accounts, you can aim to dramatically reduce taxes on your windfall.
Direct Indexing, along with other similar strategies (130/30 long-short equity strategy, for example) require careful advanced planning and minimum account balances.
It’s wise to consult with a wealth adviser and CPA to execute these moves properly.
With the right approach, you can keep more of your hard-earned profit, potentially saving hundreds of thousands of dollars that would otherwise go to taxes.
That’s money you can reinvest, save or use to enrich your life — truly a win-win for you and your financial future. You can reach out to Madrona Financial to learn more.
For over 30 years, Madrona Financial & CPAs has been helping individuals and families improve their wealth and financial well-being. Danielle Meister and the Madrona team, including nine wealth advisers and 13 CPAs, are available to meet clients locally, in Washington and Utah — or meet virtually with families and businesses across the United States.
