I spend much of my time helping founders and families plan for the moment they sell a business. The goal is simple: keep more of what you earn. There is a legal, rules-based way to reduce, and in many cases eliminate, the capital gains bill tied to an exit. It uses accelerated tax-loss harvesting inside a diversified portfolio, matched to the timing of your sale. Done right, it can drive your tax bill down toward zero while keeping your money invested.
We’re helping seven families sell businesses right now, and there’s only one thing they have in common: none of them are paying a dollar in taxes. From a $12 million exit to a $3 billion exit—$0 in taxes.
The Problem Most Sellers Face
On a typical $10 million exit, the federal long-term capital gains tax alone can be about $3 million, depending on your state. That is money you no longer have working for you. Many owners assume that the bill is fixed. It is not. With planning, you can cut it sharply and often remove it entirely.
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The Strategy in Plain Terms
We use a diversified portfolio designed to realize losses quickly and at scale. Those realized capital losses offset the capital gains from your sale. It is the same tax-loss harvesting method long used by large investors, but applied with speed, breadth, and discipline to meet a specific deadline.
If you take that same $10 million exit liquidity and allocate it here, it will harvest about $9.2 million in capital losses this year, taking that $3 million tax bill down to roughly $240,000. With a little forward planning, you can eliminate that tax bill entirely.
That is the core idea. Match realized losses to realized gains in the same tax year. Keep the portfolio invested so you do not miss the market while realizing those losses.
How Tax-Loss Harvesting Works
Tax-loss harvesting means selling securities at a loss and using those realized losses to offset realized gains. The IRS allows net capital losses to offset capital gains without a dollar cap. If losses exceed gains, you can use up to $3,000 against ordinary income and carry the rest forward to future years.
The key is staying invested. After you sell a position at a loss, you buy a similar—but not “substantially identical”—replacement. This keeps your market exposure. It also avoids the wash sale rule, which disallows a loss if you repurchase the same or substantially identical security within 30 days.
In practice, that means rotating between highly correlated holdings that pursue the same market exposure. You can realize losses while keeping your overall allocation aligned with your plan.
What Makes This Approach Rapid
The difference is scale and speed. Rather than a handful of tax events over a full year, we target many small losses across a broad set of holdings in a short window. Volatility helps. More price dispersion across names and sectors means more harvestable losses, even in an up market. That creates a “bank” of losses to pair with your gain.
When your sale closes, the capital gain lands in the same tax year. The harvested losses, realized earlier or later that year, offset it. The timing matters. The process has to begin early enough to realize the needed losses by year-end.
A Simple Example
Assume a founder sells a company and realizes a $10 million long-term capital gain. At a 20% federal rate and a 3.8% net investment income tax, the federal bill is often near $2.38 million before any state taxes. Many sellers also face a state bill, which can be steep if they live in a high-tax state.
Now, assume that the same founder allocates $10 million into a diversified, rules-based portfolio designed to harvest losses. Due to dispersion and frequent rebalancing, the portfolio realizes roughly $9.2 million in capital losses that year. Those losses reduce the gain dollar-for-dollar. The remaining $800,000 in net gain results in a federal bill that is a fraction of the original estimate. With a larger or longer loss-harvest window, carryforwards, or state-specific planning, that bill can drop to zero.
Why It Works
- Losses offset gains without a dollar cap. This is spelled out in the tax code.
- Volatility creates harvesting opportunities even when markets rise over the year.
- Replacement securities keep you invested and help limit tracking error.
- Excess losses carry forward to future years if they are not fully used.
Important Rules and Guardrails
The wash sale rule is the big one. You cannot claim a loss if you buy the same or a substantially identical security within 30 days before or after the sale. There needs to be a clear replacement that is similar in exposure but not in security.
Short-term and long-term designations also matter. Capital gains and losses are classified by holding period. Short-term losses first offset short-term gains, which are taxed at higher ordinary rates. Long-term losses offset long-term gains. After that, any remaining net losses can be applied across types.
Recordkeeping must be precise. Every realized trade, basis, and replacement needs to be tracked. This is where professional systems help. It is also why process discipline is essential. You should not rely on a few ad-hoc trades. The structure must operate daily and follow set rules.
Performance While Harvesting
Investors often worry they must “pay” for tax benefits with weak performance. That is not the point. The portfolio should target market-like exposure, with tight risk controls and a clear method. Our approach has outperformed the S&P 500 since inception. That is a strong result, but it is not a promise. Markets move. Past performance does not guarantee future results. The target is twofold: reduce taxes and keep your capital compounding.
Who This Suits
This method helps founders, majority owners, and early employees who are sitting on large, concentrated gains from a sale. It can also assist public market investors who took profits in a strong year. The larger the gain, the more value the losses provide.
It is also useful across tax brackets and states. However, state taxes vary. You should review your state rules, residency requirements, and any sourcing rules applicable to the sale.
What It Does Not Do
This is not a trick or a shelter. It does not move money offshore. It does not hide income. It uses the rules as written. You are realizing actual losses in a real portfolio. You are matching those losses with gains in the same year. You are keeping detailed records and filing them.
Planning Timeline
Time is the friend of this plan. Here is a simple track:
- Six to twelve months pre-close: set goals and map tax exposure by scenario.
- Three to six months pre-close: fund a loss-harvest portfolio and begin harvesting.
- At close: confirm the actual gain, state impact, and any withholding.
- Year-end: top up losses if needed, then lock the record across accounts.
- Tax filing: file with full trade-level detail and custodial reports.
Even if your sale is closed, you can still start. You may not get to zero right away, but you can reduce the bill and carry excess losses into future years.
Common Concerns
“Will I miss the market while selling losers?” No. You sell a position, then buy a similar exposure. You stay invested. There can be tracking error, but it is managed.
“What if markets go straight up?” You can still harvest losses due to dispersion. Not every position rises at the same pace. Correlations change. Rebalancing also creates loss events.
“Is this risky?” The portfolio itself should be diversified and rules-based. The main risks are operational—poor tracking, wash sale mistakes, or untimely trades. Process and systems address those.
Other Tools That Can Help
Even if loss harvesting is the core, we often add steps:
- Charitable gifts of appreciated stock before the sale.
- Donor-advised funds for high-impact giving in the sale year.
- State residency planning, where appropriate and lawful.
- Installment sale timing, if deal terms allow.
These are optional. The central engine remains the same: harvest losses to match gains in the same tax year, keep invested, avoid wash sales, and document well.
A Founder’s Mindset
Owners know how to build value. The same mindset should apply to the exit. A plan that saves millions in tax is as real as a top customer. It raises your net worth on day one. It gives your next chapter a better start.
On a typical $10,000,000 exit, the owner pays roughly $3,000,000 in capital gains tax. The way this strategy is structured allows it to tax-loss harvest very rapidly.
That is the message I want every founder to hear. You do not have to accept a large tax bill as a given. Use the rules. Start early. Keep your capital working.
Action Steps to Consider
Here is how to begin, even if you are months away from a close:
- Quantify your likely gain under several deal structures.
- Decide how much exit liquidity to allocate to a harvesting portfolio.
- Set a rules-based process that avoids wash sales and tracks basis daily.
- Coordinate across accounts to prevent accidental wash sales.
- Align the plan with your estate, charity, and cash needs.
I have seen this approach work for families selling at $12 million and for families selling at $3 billion. The math scales. The discipline is the same.
As a CFP and CIMA, my aim is simple. Help you pay what you owe, not a dollar more. Use what the code allows. Keep your investments aligned with your goals. And make sure every step is documented and compliant.
Past results are not a promise. This is not tax advice for your situation. Your facts matter. Speak with your tax advisor and legal counsel. Then build a plan you can live with, and execute it with care.
Reduce the tax drag on your exit. Keep your wealth compounding. That is how you set up the next stage with confidence.
Frequently Asked Questions
Q: How can losses offset such a large capital gain from a sale?
The tax code allows realized capital losses to offset realized capital gains without a dollar cap. If your portfolio realizes enough losses in the same tax year, they are subtracted directly from the gain. Any unused losses carry forward for future years.
Q: Won’t I violate the wash sale rule if I reinvest right away?
You avoid wash sales by purchasing a similar, but not substantially identical, replacement. That keeps your exposure while preserving the realized loss. Careful security selection, timing, and account coordination are key to staying compliant.
Q: What happens if markets rally and I have fewer losses than expected?
Dispersion often still creates harvestable losses, but it is possible to realize fewer than needed. In that case, you reduce the tax bill as much as possible this year and carry forward any excess losses you do capture to apply against future gains.
Image Credit: Esdras Jaimes; Pexels
