Why would you want to do this? Because now you control:

• Which stocks to keep or toss (goodbye, tobacco companies if that’s not your thing)
• When to sell for tax purposes (hello, strategic losses to offset your gains)
• How much of each stock you own (perfect for avoiding doubling down on your employer’s stock)

The magic happens because you own each stock individually. Every Apple share, every Microsoft position, every Tesla holding sits in your account as a separate line item. And that gives you incredible flexibility come tax time.

Who’s Using Custom Indexing?

The strategy has exploded among high-net-worth investors. Here in Austin, I’m seeing it most with:

• Tech executives with significant RSU grants
• Entrepreneurs post-liquidity event
• Real estate investors with large capital gains
• Retirees looking to maximize after-tax income
• Inheritors managing family wealth transfers

The common thread? They all have taxable investment accounts with regular capital gains events and want more control over their tax situation.

The Tax-Loss Harvesting Playbook

Here’s where things get interesting. Remember how I mentioned you could save serious money on taxes? Tax-loss harvesting is how you do it.

How Does It Actually Work?

Picture this: You own 100 different tech stocks in your custom index. The market takes a dip in February, and 30 of those stocks are now worth less than what you paid. In a regular fund, you’d just have to wait it out.

But with custom indexing? You sell those 30 losers immediately.

“Wait,” you might be thinking, “isn’t selling at a loss bad?”

Not when you do it strategically. Here’s the beautiful part: you immediately buy 30 similar stocks to replace them. Your portfolio stays on track, but you’ve just locked in losses that will reduce your tax bill.

The Step-by-Step Process

Step 1: Find Your Losses Every morning, sophisticated software scans your portfolio. It knows exactly what you paid for each stock and what it’s worth today. When something drops below your purchase price, it flags it.

Step 2: Make the Trade You sell the losers. Not your whole portfolio. Not even whole positions sometimes. Just the specific shares that are down.

Step 3: Stay Invested Within seconds, you buy similar stocks. The key is maintaining your market exposure while capturing the tax benefit.

Smart Replacement Strategies Examples

Step 4: Use Those Losses Come tax time, those losses offset your gains. Made $100,000 selling investment property? If you harvested $100,000 in losses, your capital gains tax could be zero.

The Mathematics of Loss Harvesting

Let’s look at a typical scenario for an Austin tech executive:

Why Timing Matters

Most people think about taxes in December. By then, you’ve missed 11 months of opportunities.

Markets don’t wait for year-end to move. That tech stock that dropped 20% in March? It might be back up by December. Year-round harvesting means you capture losses when they happen, not when it’s convenient.

Consider the market volatility we’ve seen:

• January 2022: Tech stocks dropped 15-30%
• March 2023: Regional banking crisis created opportunities
• August 2024: AI stock correction provided harvesting chances
• October 2024: Pre-election uncertainty drove volatility

One of my clients harvested losses during the 2022 tech selloff. Those losses are still offsetting gains. That’s the power of building a “loss bank” you can use for years.

Building Your Loss Bank

The IRS lets you carry forward unused losses indefinitely. Here’s how the math works:

Notice how losses from 2023 are still providing tax benefits three years later? That’s strategic tax planning in action.

Dealing with That Concentrated Stock Position

Let me guess your situation. You’ve worked at the same company for years, maybe decades. Stock grants, options, employee purchase plans – they’ve all added up. Now you’re looking at a portfolio where one stock makes up 40%, 60%, maybe even 80% of your net worth.

You know you should diversify. But selling means a tax bill that makes your eyes water. So you hold on, hoping nothing bad happens to the company.

There’s a better way.

The Smart Exit Strategy

Instead of ripping off the band-aid and selling everything at once, custom indexing lets you unwind that position methodically. Here’s how:

Year 1-5: The Gradual Unwind Plan

The High-Cost Basis Trick You probably bought or received shares at different prices over the years. Some cost you $20, others $100. Sell the expensive ones first. Smaller gains mean smaller taxes.

Let’s say you own Apple stock from different periods:

By selling the 2024 shares first, you pay just $1,000 in taxes versus $23,000 if you sold the 2020 shares. Same reduction in concentration, 95% less tax.

Advanced Diversification Techniques

Beyond simple selling, consider these strategies:

Exchange Funds Pool your concentrated stock with other investors’ concentrated positions. You get diversification without triggering taxes immediately. The catch? You typically need to hold for 7 years.

Charitable Remainder Trusts (CRTs) Donate appreciated stock to a CRT, get an immediate tax deduction, receive income for life, and avoid capital gains tax entirely. Perfect for highly appreciated positions.

Options Strategies Use covered calls or protective puts to generate income or protect downside while you gradually diversify. This works especially well for volatile tech stocks.

Examples of Success Stories

Corporate Executive A client retired with $2.5 million in employer stock – half their portfolio. Over three years, we reduced it to 10% while saving $145,000 in taxes through strategic loss harvesting. They sleep better, and their portfolio is stronger.

Here’s exactly how he did it:

• Year 1: Sold $800K of highest-basis shares, harvested $150K in losses from other holdings
• Year 2: Market dip allowed us to sell $900K with minimal gains, harvested another $125K
• Year 3: Final $700K reduction, donated $100K to Austin Community Foundation

The Startup Founder Post-IPO, this founder had $12 million tied up in one company. Using a 10b5-1 trading plan (which pre-schedules trades to avoid insider trading issues), he diversified into a custom Nasdaq 100 index minus their company. Tax savings: $320,000.

The 10b5-1 plan was crucial here. As an insider, they couldn’t trade based on material non-public information. The plan let them diversify systematically without legal concerns.

The Inherited Fortune An Austin family inherited $5 million in energy stocks. Thanks to stepped-up basis rules (the IRS resets your cost basis when you inherit), they sold immediately with zero capital gains tax, then built a diversified energy portfolio of 60+ companies.

This is a critical point: inherited assets get a fresh start for tax purposes. If you’ve inherited concentrated positions, you often have a golden opportunity to diversify tax-free.

The IRS Rules You Need to Know

Before you get too excited, let’s talk about the rules. The IRS isn’t giving away free lunches, but if you play by their rules, you can feast.

The Wash Sale Rule (The Big One)

IRC Section 1091 says you can’t claim a loss if you buy the same or “substantially identical” security within 30 days before or after selling.

Here’s what triggers a wash sale:

Translation: Sell Apple at a loss? Don’t buy Apple again for 31 days. But you CAN buy Microsoft or a tech sector ETF immediately. That’s the workaround that makes custom indexing so powerful.

Loss Limits and Carryforwards

The IRS caps how much you can deduct:

I have clients still using losses from 2020 to offset gains today. It’s like a tax credit that never expires.

Choosing Which Shares to Sell

IRC Section 1012 lets you pick specific shares to sell. This is huge. You have three choices:

For custom indexing, always use specific identification. It gives you complete control over your tax situation.

Is Custom Indexing Right for You?

Let’s be honest about who benefits most from this strategy.

The Ideal Candidate Checklist

When It Might Not Make Sense

• Your portfolio is under $500,000 (costs might outweigh benefits)
• Most of your money is already in tax-deferred accounts
• You prefer complete hands-off investing
• You don’t have taxable gains to offset
• You’re in a low tax bracket (savings minimal)

The Tax Savings Are Real

Let me show you the math across different portfolio sizes:

Annual Tax Savings Potential

Note: 23.8% includes 20% capital gains + 3.8% net investment income tax for high earners

These aren’t theoretical numbers. These are based on what we’re seeing with actual client portfolios in Austin.

Technology Making It Possible

You might be wondering: “How do I manage hundreds of individual stocks?”

Ten years ago, this was nearly impossible for individual investors. Today, technology handles the heavy lifting:

• Automated Rebalancing: Software maintains your target weights
• Tax Optimization Engines: AI identifies harvesting opportunities daily
• Risk Monitoring: Algorithms track your tracking error
• Trade Execution: Fractional shares mean perfect index replication

The same technology hedge funds use is now accessible to individual investors. You get institutional-grade tax management in your personal account.

Taking the Next Step

Custom indexing isn’t just another investment product. It’s a sophisticated tax strategy that can fundamentally change your after-tax returns.

For Austin’s tech executives, entrepreneurs, and high-net-worth families, it solves two critical problems: reducing taxes and managing concentration risk. The technology exists today to make this accessible and manageable, even with hundreds of individual positions.

Your Action Plan

Here’s what you should do next:

1. Calculate your concentration risk – If one stock is more than 20% of your portfolio, you need a plan
2. Review your recent tax returns – Look at your capital gains. Could you have offset them?
3. Consider your upcoming taxable events – Planning to sell property? Exercise options? Start harvesting losses now
4. Tally your unrealized gains – Know what you’re sitting on
5. Get a portfolio analysis – A good advisor can show you exactly how much custom indexing could save you

The clients who benefit most start before they need it. They build their loss bank in advance, gradually reduce concentration, and systematically lower their tax bills year after year.

Questions to Ask Your Advisor

Before implementing custom indexing, get clear answers to:

• What’s the total cost including management fees and trading?
• How will you handle the wash sale rules?
• What’s the expected tracking error to my target index?
• How often will you harvest losses?
• Can I exclude specific companies or sectors?
• How will you report the tax benefits?
• What happens if I need to liquidate quickly?

Remember, not all custom indexing solutions are equal. Some are fully automated, others have human oversight. Some harvest daily, others quarterly. The right choice depends on your specific situation.

Ready to keep more of what you’ve earned? Let’s talk about building your custom indexing strategy.