Direct Indexing: A Smart Strategy for Managing Large Unrealized Gains

Lately, more clients have been asking how to handle significant unrealized gains in their portfolios. A common example? Stocks like Nvidia (NVDA)—which surged approximately 800%+ from October 2022 to March 2025, despite being down nearly 14% year-to-date.

After a strong bull market, many investors now hold large, concentrated positions—often worth six figures or more. The question then becomes: What’s the best way to manage these gains without unnecessary tax burdens?

For some, charitable giving provides a tax-efficient way to offload highly appreciated assets. Others may plan to pass investments down to heirs, taking advantage of the step-up in basis at death. But what if you intend to use this money in retirement? Holding onto these gains unchecked could pose serious risks.

The Risks of Holding Large Unrealized Gains

1. Concentration Risk

Holding a single high-performing stock can put your financial security at risk—especially in retirement. The saying “Don’t put all your eggs in one basket” exists for a reason.

Take Nvidia (NVDA) as an example. While its recent growth has been remarkable, it also suffered a 50.28% drop in 2022. A similar future decline could have a devastating impact on your retirement portfolio.

2. Potential Tax Policy Changes

Capital gains tax rates could increase in the future.

Currently, many investors benefit from the 15% long-term capital gains tax rate—but tax laws are ever-changing. Without proactive planning, future gains could be taxed at significantly higher rates.

A Smarter Approach: Direct Indexing

One powerful way to manage large unrealized gains—without getting hit with an excessive tax bill—is Direct Indexing. This strategy has been around for years, but advancements in technology have made it more accessible, with lower minimum investment requirements.

What Is Direct Indexing?

Direct indexing involves buying individual stocks that make up an index, rather than investing in a traditional index fund or ETF.

This approach allows for:

✅ Tax-loss harvesting – Selling underperforming stocks to offset gains and reduce taxable income.

✅ Customization – Avoiding stocks you already own or don’t want in your portfolio.

✅ Index Tracking – Maintaining overall market exposure while optimizing for taxes.

Real-Life Example: Large Unrealized Gain in Microsoft

This summer, I had the opportunity to work with a client facing a unique financial challenge. She owned approximately $3.5 million in Microsoft stock, with a cost basis of just $500,000. Having worked at Microsoft for many years, she had accumulated shares over time.

While simply holding onto stock doesn't typically require an advisor (though many would benefit from professional guidance), she recognized the need for help in strategically unwinding her concentrated position.

Together, we implemented a Direct Indexing strategy, infusing it with cash and utilizing tax-loss harvesting to offset her sizable gains. This approach is allowing us to gradually reduce her concentrated position while adhering to a carefully planned tax budget.

Another advantage? Customization. Since the investor already owns a significant amount of Microsoft, we can exclude it from their direct indexing portfolio to avoid over-concentration.

Why Direct Indexing Matters for High-Net-Worth Investors

For those with taxable accounts, Direct Indexing provides a powerful combination of diversification, tax efficiency, and customization—allowing you to grow and preserve your wealth while reducing what you owe to Uncle Sam.

Want to explore whether Direct Indexing makes sense for your retirement plan? Let’s talk.