How Direct Indexing Helps Offset Capital Gains Taxes

If you’re facing a large capital gain—either this year or in a planned future exit—you may be looking for smart, legal ways to reduce your tax liability. Or maybe you’re holding a stock with significant gains and want to diversify without triggering a tax bill. In either case, direct indexing can offer a powerful solution.

At Horizon Wealth, we often work with high-net-worth investors and advisors navigating this exact challenge. In this article, we’ll explain how direct indexing works, how it helps you harvest tax losses, and why it’s especially valuable for those planning for a liquidity event or trying to exit a concentrated stock position.

What Is Direct Indexing?

Direct indexing is an investment strategy where you replicate a market index—like the S&P 500—by owning the individual stocks directly, rather than through a mutual fund or ETF.

This gives you granular control over your portfolio, enabling tax loss harvesting at the individual security level.

How Direct Indexing Helps You Offset Capital Gains

If you’ve recently sold a business, investment property, or appreciated stock—or plan to—those gains may be taxed at 15%, 20%, or even higher depending on your income. A multi-million-dollar gain could come with a seven-figure tax bill.

And if you’re still holding a large, appreciated stock position, exiting can trigger the same tax consequences.

Direct indexing allows you to systematically sell losing positions in your portfolio—even while tracking the broader index performance. These realized losses can offset realized gains on your tax return, reducing your capital gains tax liability.

Planning Ahead: A Strategic Use of Direct Indexing

If you're preparing to sell a business, real estate, or another appreciated asset in the next few years, planning for the tax impact now can make a significant difference later.

Rather than waiting until the gain is realized, a direct indexing strategy allows you to:

• Begin accumulating capital losses today by harvesting declines across a diversified portfolio.
• Carry those losses forward until they’re needed.
• When the asset is sold, use the losses to offset the gain—potentially reducing your tax liability by tens or even hundreds of thousands of dollars.
  
  Key takeaway: Direct indexing creates a tax-loss “bank” you can use to soften the tax hit of a future exit or liquidation event.

Direct Indexing for Stock Diversification

Direct indexing helps you:

• Begin selling the appreciated stock over time.
• Simultaneously harvest losses in other portfolio holdings.
• Use those losses to offset gains as you gradually exit the position.
• Ultimately, diversify more tax-efficiently than you could by simply selling all at once.

Key Advantages of Direct Indexing for Tax Management

• Targeted tax-loss harvesting at the individual stock level
• Ability to offset capital gains from any source
• Losses carry forward indefinitely
• Maintains exposure to market performance
• Avoids wash sales through smart substitutions
• Enables tax-smart diversification from legacy holdings

Common Misconceptions About Direct Indexing

• “Isn’t this only useful in down markets?”

No. Even in strong markets, individual stocks experience losses. Direct indexing captures these micro-movements, even when the overall index is up.

• “Won’t my returns deviate from the index?”

• “Is this just for ultra-wealthy investors?”

Not anymore. Advances in technology have made direct indexing widely accessible, even for portfolios starting in the low six figures, depending on the provider.

Conclusion: Use Direct Indexing to Prepare for Future Gains

Whether you're planning to sell a business, exit a stock position, or realize another major capital gain, direct indexing offers a proactive way to reduce your future tax liability.

By harvesting losses today, you create a bank of offsets for tomorrow. And with the ability to customize holdings and track an index closely, it’s a strategy that marries tax efficiency with portfolio performance.

At Horizon Wealth, we help investors and advisors use direct indexing as part of a deliberate, tax-smart wealth strategy.

Important: Always consult with a qualified tax professional or financial advisor before taking action. Your specific situation, timeline, and tax profile should guide any investment or tax strategy.

Horizon Wealth is a registered investment adviser. The information presented in this broadcast is the opinion of Horizon Wealth and does not reflect the view of any other person or entity.  The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies.  This is for information purposes and should not be construed as an investment recommendation.  Past performance is no guarantee of future performance.