Tax-Smart Diversification: The Real Tools That Can Improve Outcomes

Start With the Hierarchy, Not the Tools

Before I get into a single strategy, I'll do the "sounding like a broken record" thing one more time and flag that tax strategy is powerful and worth pursuing, but it should be prioritized third. It is the icing, not the cake.

Here's the order of operations I follow with every client:

1. Layer one — your financial plan. What is this money actually for? Freedom, early retirement, starting a company, real estate, charitable impact, generational wealth? The plan for your money defines the destinations the money has to reach; how much to sell and de risk and why, etc.

2. Layer two — your investment portfolio and SpaceX equity holdings plan. What level of risk are you willing to take, both with SpaceX specifically and with your portfolio overall? How rapidly will you diversify, and into what portfolio risk level; and how much (if any) SpaceX holdings do you aim to keep. These two work as a pair — they define how your wealth is setup to grow long term, and the risk you're taking that it may not

3. Layer three — your tax strategy. After having the first two items above locked in, how do we then implement smart tax strategy to keep as much of the gain as possible?

Said another way: Tax strategy serves the plan. The plan does not serve the tax strategy.

I've seen clients hesitate to sell stock and diversify because the tax bill that would trigger felt high — and then watch the stock drop 30%-90% and erase ten years' worth of tax savings. I've also seen clients lock themselves into complex tax structures that constrained their flexibility for a decade, all to save a few percentage points on something they could have just paid.

The right rule: never take a tax strategy that puts you out of alignment with your investment plan or your financial plan. If a strategy reduces your tax bill but forces you to hold a concentrated position longer than your risk tolerance allows, it's the wrong strategy for you — full stop. I'd always recommend paying a higher tax bill and sleeping well than chasing a tax deferral and worrying about the excess risk you're taking because of it.

With that out of the way, let's get into the strategies.

Tier One: Core Blocking and Tackling

These are the strategies every SpaceX employee with meaningful equity should be using or at least considering. They're not exotic, they don't require third parties, and they don't lock you into anything. They are, frankly, what good tax work looks like at the baseline — and the impact compounds across a multi-year diversification window.

1. Choose the Right Tax Lots When You Sell

You likely have dozens of SpaceX "tax lots" -- which are the prices you bought or vested SpaceX shares at. When you sell, most brokerage accounts have a default for which lots they sell (e.g. "first in, first out" (FIFO); which sells the oldest ones first). For any equity with multiple tax lots, you almost always want to be manually selecting the lots yourself for optimal tax treatment.

Every share you own has a cost basis (what the IRS sees as your purchase price) and a holding period (how long you've held it). When you sell, the difference between sale price and cost basis is your gain. So the lot you choose determines the size of the gain you recognize and whether it's taxed as long-term or short-term.

The optimal move: utilize specific lot identification and choose the lot(s) on every sale. A few situations where this matters most:

• Avoiding short term capital gains. Selling a lot that hits the one-year long-term capital gains threshold versus one that's still short-term can mean a roughly 17% federal tax-rate difference on the gain — on the same dollar.

• Higher vs lower cost basis. Your ISO-exercised shares and multiple RSU and ESPP vesting periods likely result in dozens of cost bases for holding. Selling the higher basis shares first produces a smaller gain--and thus less tax--at the same sale price.

• ISO shares and AMT recoup. If you exercised ISOs and paid AMT, those shares have two cost bases — a regular tax basis (your strike) and an AMT basis (FMV at exercise). When you sell, lot selection interacts directly with your AMT credit recovery (see #3 below).

For our 4,000-ISO client with a $56 cost basis and shares worth $526, every share sold produces a $470 long-term gain. If they also own 1,000 RSU-vested shares with a basis of, say, $480, selling those RSU shares first produces a $46 gain per share — roughly a tenth the tax cost for the same dollars of liquidity. Sequencing matters.

For more info, visit our Academy article on tax lot management

2. Use Tax-Loss Harvesting You Already Have

If your overall investment portfolio holds any positions sitting at a loss — and many do somewhere — those losses can offset realized SpaceX gains dollar-for-dollar.

The move: Audit your full investment portfolio now (taxable brokerage accounts, only — losses inside retirement accounts don't count) for unrealized losses. A few quick principles:

• Pair the harvesting deliberately. If you're recognizing $500K of long-term gain on SpaceX, $200K of harvested long-term losses elsewhere reduces the taxable gain to $300K — that's roughly $48K saved at the federal long-term capital gains rate.

• Watch the wash-sale rule. If you buy back the same or "substantially identical" security within 30 days before or after the loss sale, the loss is disallowed. Use a replacement position in a similar but not identical exposure (a different ETF tracking a similar index, for example).

• Don't sell good investments just to harvest. Loss harvesting is opportunistic. If a position is at a loss for a reason and you'd want to be out of it anyway, harvest. If it's a great long-term holding that happens to be down, you may want to leave it.

For more info, visit our Academy article on tax loss harvesting

3. Optimize the Timing of Gains, Holding Periods, and AMT Credit

The same dollar of gain can be taxed at very different rates depending on when you recognize it and what holding-period bucket it falls into. A few of the highest-leverage timing moves for SpaceX employees:

• Long-term vs. short-term capital gains. If you have choice (most likely by selling different lots), holding a share that is at a sizeable gain for at least a year and a day from acquisition gets you the long-term rate (currently 20% top federal, plus 3.8% Net Investment Income Tax in most cases) instead of the short-term rate (your ordinary income rate, up to 37% federal). On a $1M gain, that's roughly $170K of federal tax difference.

• ISO qualifying disposition status. If you exercised ISOs, the path to the long-term requires holding both at least one year from exercise and at least two years from grant. Miss either, and the exercise turns into a disqualifying disposition with less favorable tax treatment.

• AMT credit recoupment. If you paid AMT in a prior year from exercising ISOs, you have an AMT credit carryforward. When you eventually sell those shares, the dual-basis mechanic flips: your AMT basis is higher (using our prior example of $526 vs. $56 regular basis), which reduces the AMT gains relative to normal long-term capital gains, which in turn frees up the AMT credit for recoup. Said another way, selling ISO-acquired shares is what drives material AMT credit recoup; if you don't sell them, the AMT credit will mostly stay in place.

• Spreading gains across tax years. A $4M sale recognized in a single calendar year hits the top brackets hard. The same $4M spread across 3 or 4 years — half this December, half next January, the rest the year or two after, for instance — can meaningfully reduce the effective rate.

4. Manage Your Tax Brackets When You Have Optionality

Federal and state income tax systems are progressive — the first dollar gets taxed at a low rate, each new dollar gets taxed at a higher one. Capital gains have their own brackets that work similarly. The implication: the marginal tax cost of recognizing more gain in a year that's already big is much higher than the same dollars in a quieter year.

If your plan allows flexibility, structuring sales to not unnecessarily cross brackets can preserve meaningful dollars:

• The 20% LTCG bracket threshold. Long-term gains up to roughly $600K of taxable income (for joint filers, 2026 figures and rounded) are taxed at 15% federal + 3.8% NIIT; above that, 20% + NIIT. The 5% jump applies to every gain dollar above the threshold.

• The NIIT cliff. The 3.8% Net Investment Income Tax kicks in above ~$250K of joint modified AGI, with no phase-in. If you're hovering around that line, even small income/gains shifts can switch entire chunks of investment income on or off the NIIT.

• State-level cliffs. California has no preferential capital gains rate and tops out at 13.3%. New York City stacks state and city. If you've got a sale window of multiple years, the year-to-year stacking matters.

For more info, visit our Academy article on managing your capital gains tax bracket

Tier Two: A Bit More Effort, Often Worth It

These strategies require incrementally more effort, setup time, and/or fees vs the tier one "core" above. But not a ton of incremental time/effort/cost; and the tax benefits in many situations can be worthwhile.

5. Direct Indexing

Once you start selling SpaceX and investing the proceeds, you are likely to have a healthy allocation of that to publicly traded stocks. A commonly utilized option is an index ETF. It works great, and it's simple (which is good), but it won't generate loss-harvesting opportunities when most of the stocks are up but a portion are down.

Direct indexing flips that. Instead of owning one S&P 500 ETF, you own 150-300 of the ~500 individual stocks roughly proportionate to the index. The index exposure is the same; the difference is that individual stocks are constantly moving up and down. So even in a year where the index is up 15%, plenty of names inside it are down. Direct-indexing would purposefully sell/harvest losses at the individual-stock level and replace them with similar-exposure positions to maintain the index profile. This creates some modest taxable losses you can use to offset other gains — such as SpaceX sales.

Tax impact. For $1m of cash invested in Direct Indexing, you might expect 8-10% ($80k to $100k) in losses in the first year. Then 4-5% in year two, and continued lower amounts in future years (e.g. 0-3%).

6. Charitable Strategies That Do Double Duty

If you have charitable intent — meaning you were going to give to charity anyway, regardless of the tax outcome — there are a few moves that materially improve the after-tax math. The key principle: give appreciated stock instead of cash.

When you donate cash, you get a tax deduction equal to the cash amount. When you donate long-term appreciated stock directly to a qualified charity (or a donor-advised fund), two things happen:

1. You get a tax deduction equal to the full market value of the stock

2. You avoid the capital gains tax entirely on the appreciation.

For a SpaceX share with a $56 basis worth $526, donating one share gets you a $526 deduction against income (subject to IRS and state caps) and eliminates the $470 of embedded gain you'd otherwise pay tax on if you sold. Compared to selling first and donating the after-tax cash, the appreciated-stock route often delivers 25–50% more value to the charity and you, on a dollar-for-dollar comparison.

A few you ways can implement this:

• Most Popular: Donor-advised funds (DAFs). A DAF is a charitable account at a sponsoring organization (e.g. Fidelity Charitable, Schwab Charitable). You contribute appreciated stock, take the full deduction in the year of contribution, the stock is liquidated tax-free inside the DAF. You then can invest the funds to grow, and you choose when and how much to grant to any charity you want — can be days or decades later.

• Direct gifts to operating charities. Identify the charity, work with their gift acceptance team, transfer shares. Sounds easy, but some are not well setup to accept shares, which is why the use of DAFs are increasingly well suited and popular.

• Charitable bunching strategy. If your normal annual giving is around the standard deduction threshold, you may not itemize most years and thus don't get the full tax benefits. DAFs allow you to bunch several years of giving into one year, pushing you way over the standard deduction in the high-income year. You take the itemized deduction that year (getting the extra tax benefits), and just give out of your DAF the same targeted amount each year.

The honest caveat: this is only a "savings" if you were going to give anyway. Charitable giving for tax savings alone is a losing proposition mathematically — you'd always net more by keeping the money and paying the tax. The charitable strategies in this section assume you have charitable intent and want to optimize the form of the gift.

For more info, visit our Academy article on donor advised funds

7. State Residency Strategies — Where You Live Is a Tax Decision

This one isn't for everyone, but for clients in high-tax states with flexible lives or existing desires to relocate, it can swing the after-tax outcome more than most tax strategies.

California, New York, Oregon, Hawaii, Minnesota, New Jersey, and a handful of others tax capital gains at the same rates as ordinary income — meaning a 10–13%+ state tax bill on top of federal on every dollar of SpaceX gain.

Meanwhile — states like Florida, Texas, Tennessee, and Nevada have no state income tax at all. On a $5M gain, the state-level difference could be $500–650K.

The question is not "should I move?" — it's "where do I actually want to live, and does the timing of that decision interact with my SpaceX sell plan?"

If you were already planning to leave a high-tax state in the next few years for life reasons — family, cost of living, kids' schools, retirement — the timing of that move matters enormously. Establishing residency before recognizing the bulk of your SpaceX gains can preserve substantial after-tax dollars.

But make sure it's true move and you do it for the long term. Genuine domicile change requires a real life shift: physical presence (typically more than half the year), home, drivers' license, voter registration, doctors, social ties, and so on. State tax authorities (particularly California and New York) contest residency aggressively when there's a large gain on the line. Half-measures don't survive audit.

When it makes sense: the move was already in your life plan, the dollars are large enough to justify the planning effort, and you can execute a genuine domicile change in advance of the gain recognition.

When it doesn't: you'd be uprooting your life just to dodge taxes. The dollars may be big, but life satisfaction matters a lot and usually wins this trade-off long-term. (And see the hierarchy framing above: don't let the tax strategy drive the life plan.)

For more info, visit our Academy article on state relocation

Tier Three: Higher Complexity and Limitations, But Powerful in Certain Scenarios

The below strategies have incrementally more time and effort, fees, and/or restrictions versus the others that have been noted. In the right situation they can add a lot of value; I've discussed and utilized each of them with some clients. But — you need to assess them for your situation and goals to ensure they're worth pursuing.

8. Tax-Aware Long/Short Portfolios

A tax-aware long/short portfolio (often called a "130/30" or "150/50" structure) is somewhat like Direct Indexing but amplified. In addition to purchasing individual stocks, it layers on additional long and short positions (e.g. a $1m portfolio with 130/30 would have $1.3m long and $0.3m short). By adding on the long/short portion, the portfolio maintains close economic exposure to its target index (e.g. S&P500), but generates materially more capital losses (which are recognized for the tax benefit) and offsetting gains (which are not recognized and instead deferred to the future).

Tax impact. For $1m of cash invested in 130/30, you might expect 22-28% ($220k to $280k) in losses in the first year. Then 18-20% in year two, and continued lower amounts in future years (e.g. 12-15%). Higher leverage ratios (e.g. 145/45, 200/100) provide higher targeted amounts of capital losses, but come with higher management fees and financing costs.

When it makes sense (or doesn't): This strategy depends materially on your life plan and future estimated tax brackets. The ability to significantly reduce your tax bill when you have big gains from selling SpaceX exists here. And deferring tax payments to future years has material value. But that needs to be compared against the fees and costs, incremental risks, and what your future anticipated tax bracket will be.

For more info, visit our Academy article on tax-aware long/short portfolios

9. Exchange Funds

An exchange fund pools different concentrated positions from multiple wealthy investors into a single diversified fund. For example, 20 people with $1m of a different stock all participate. You contribute your $1m of SpaceX shares ($150k cost basis); and in return you own 5% of a $20m pooled fund that holds each of those 20 companies (your cost basis is still $150k). Critically, the contribution isn't a taxable event — your original SpaceX cost basis carries forward into your fund units.

The trade off. You have to maintain the investment in the fund for seven years to get the diversified exposure without triggering the gain (exiting sooner than that 7 years is typically very penalizing). After 7 years, you'd receive your pro-rata ownership of all the stocks in the pooled fund, aggregated to your original SpaceX cost basis (e.g. the sum of the cost basis across all 20 stocks will be your $150k original). You haven't avoided the tax — you've deferred it and converted concentrated exposure into materially more diversified exposure during the deferral.

When it makes sense: you have a large concentrated position, you genuinely want diversification without recognizing the gain right now, and you're OK with a seven-year hold requirement for those specific dollars.

Important flag: Exchange funds only launch periodically, and the fund has to be accepting your security. SpaceX shares are likely to be very popular in the next few years for exchange funds, which could mean that it would be months (or even years) of waiting to participate in an exchange fund before you are able to with SpaceX holdings.

For more info, visit our Academy article on exchange funds

10. Hedging With Derivatives or Prepaid Variable Forwards

If you have to hold SpaceX for some reason — concentration is high but you can't sell because of employment, tax timing, or other reasons — tools exist to limit the downside. The basic structures:

• Protective puts. Buy a put option at or below the current price. If SpaceX drops below the strike, the put protects you. Cost: the option premium.

• Collars. Buy a protective put and simultaneously sell a covered call at a higher strike. The premium you receive from the call helps fund (or fully funds) the put. The trade-off: you cap your upside above the call strike in addition to protecting against the downside.

• Prepaid variable forwards (PVFs). You agree to deliver shares to a counterparty at a future date based on a price formula (typically similar to a collar with a minimum and maximum). With the stock price locked into a range, most PVFs provide a cash advance of the current value. Effectively monetizes the position without triggering the gain today.

When it makes sense: if you have a concentrated position that you don't want to take price risk with, but there is a hurdle or economic motivator (e.g. a lower tax bracket in a future year) that makes hedging more desirable than selling.

One important note on SpaceX specifically: if you're an active employee, consult the company trading, hedging and lockup policies. Nearly all lockups disallow hedging instruments, and some (but not all) publicly traded company policies block employees from trading derivatives (call options, put options, PVFs).

For more info, visit our Academy article on hedging

11. Charitable Remainder Trusts (CRTs)

A CRT is a dual-purpose, irrevocable trust you create and fund with appreciated stock. The trust sells the stock — tax-free, because it's a charitable entity — and reinvests the proceeds to create a diversified portfolio. That's the big plus; rapid full diversification without the immediate tax bill. In the following years, the trust distributes a specified amount of funds each year back to you (depending on the terms you specified), and those distributions are taxable in the distributed year. Then, at the end of the CRT life, the remaining balance passes to a charity you specify. Also, in the year you fund the CRT, you receive an immediate charitable deduction for the estimated percentage that will go to charity at end of life.

There are flavors — CRUTs (annuity is a percentage of the trust's value), CRATs (fixed dollar annuity), and variations like NIMCRUTs that can be useful in particular circumstances — but the core mechanic is the same.

When it makes sense: you have a large concentrated position, real charitable intent, an interest in an income stream over many future years rather than a lump sum now.

When it doesn't: If you're not charitably inclined, need the bulk of the funds sooner, or are considering setting one up with less than $1m. In all those situations, the charitable requirement, the time to future distributions, and/or the annual administrative requirements (separate tax return, valuations, distributions) typically outweighs the benefit.

For more info, visit our Academy article on Charitable Remainder Trusts

12. Opportunity Zone Investments

Qualified Opportunity Funds allow you to defer (and partially exclude) capital gains by reinvesting realized capital gains into a qualifying real estate or business project in designated low-income census tracts. The mechanics require that you realize a capital gain (i.e. you sell first here), and then you have 180 days after the sale to reinvest those proceeds into a qualifying opportunity zone fund. Once done, you get three tax benefits:

1. The realized gain is deferred for 5 years (e.g. sold in 2027, not payable until 2032)

2. The gain is reduced by 10% if you hold the investment for 5 years (e.g. a $1m realized gain in 2027 becomes a $900k realized gain due in 2032)

3. If you hold the investment for 10+ years — the appreciation of the QOF investment is tax free (e.g. the $1m invested grows to $2.2m over 10 years. The $1.2m gain is tax free).

Key Flag: QOZ funds were refreshed and made permanent in 2025 tax legislation, but the new refreshed program does not start until 2027. Additionally, the applicable census tracts for 2027+ have mostly not been identified. Last, the refreshed 2025 also introduced new rural opportunity zones with different tax benefits as well.

When it makes sense: you've already recognized a meaningful gain and have the 180-day window in front of you; you have genuine interest in long-term real estate or operating-business investment in OZ-designated areas; and you are OK with 10-year illiquidity and the project-specific risk of the underlying investment.

When it doesn't: if you wouldn't make the underlying QOZ project investment on its own merits. The most expensive financial mistake I see in this category is people letting the tax tail wag the dog — pouring gains into a mediocre real estate project because the OZ tax break sold them on it. A bad investment with a tax break is still a bad investment.

For more info, visit our Academy article on Opportunity Zones

13. Section 351 Exchanges (Stock-to-Fund Conversions)

A Section 351 exchange allows one to contribute a diversified portfolio of individual stocks to a newly-formed ETF in a tax-deferred transaction. The contribution doesn't trigger gain and your original cost basis carries into the ETF units. Unlike an exchange fund, the result is a new ETF that is publicly traded (liquid), and you have very minimal or no time holding requirements.

The challenge is that you need to contribute a diversified portfolio; the maximum any one stock can be as part of the portfolio is 25%. That typically limits this strategy to individuals with material non-SpaceX assets.

For more info, visit our Academy article on 351 Exchanges

A Quick Word on What's Not in This Article

Everything above is built around managing capital gains tax on a SpaceX equity position. That's the dominant tax problem for most SpaceX employees going through a liquidity event. But it isn't the only one, and a complete tax plan touches several other categories I want to acknowledge briefly here without going deep.

Income tax management. Distinct from capital gains, these strategies focus on the ordinary income side of the return — particularly relevant if you're exercising NSOs (which generate ordinary income on the spread) or have a high-comp year due to lots of RSU vesting. The strategies here are more limited typically:

• Max out your and your spouse's 401(k) contributions

• Manage NSO exercise timing across calendar years to control ordinary income bracket exposure.

• Charitable deductions reduce ordinary income as well as offsetting capital gains-driven income, if you are charitably inclined

Last, there are more advanced income tax strategies — including (i) real estate professional status, (ii) short-term rental loophole with active participation, (iii) and unique investments like oil and gas, solar, and select hedge funds. In very specific circumstances, these can produce ordinary income offsets. They're outside the scope of this article, but they exist, and a sophisticated tax plan may consider them.

For more info, visit our Academy article on income tax strategies

Estate planning. Depending on the level of wealth your SpaceX liquidity event creates, you may be looking at potential future federal estate tax exposure (and state-level estate or inheritance tax in some states). The current federal estate tax exemption is substantial — but for SpaceX employees with meaningful equity, the threshold can come into play. Multiple strategies exist for this category as well — including various trust structures, gifting strategies, and direct family wealth transfers. These strategies are also outside the scope of this article, but if your position is large enough that estate tax is a real consideration, it should be addressed in parallel with everything else, not as an afterthought.

For more info, visit our Academy article on estate planning strategies