Most investors hate taxes.
I can tell by the way they're two-steppin' 'round "the rule."
That rule is diversification, and it's a sacred part of investing that can be easily overlooked and underestimated when tax liabilities are involved.
I'm sure you've heard a client with a large stock holding say something like:
"I know I need to diversify, but my gains in stock XYZ are so large that the tax bill will crush me."
The asset management industry has taken notice that a lot of investors feel this way about stock XYZ, and have provided a litany of solutions to help address this "problem".
Put/call collars. Exchange funds. Long/short direct indexing. 351 exchanges. The list goes on, and full disclosure we use strategies like these at Triad Wealth where appropriate.
But is it possible that by working so hard and adding so much complexity to try and solve one problem, you can accidentally create another?
Are we choosing taxes over... money?
To help illustrate this dilemma, let's take a look at Tesla (TSLA) stock which is up over 22,000% since it's 2010 IPO. Now let's say you entered 2026 with $100k in TSLA, and that represents a 100x return on investment (so a cost basis of $990). Tesla has had a great run these past few years but has been wildly volatile, including a nearly 74% max drawdown in 2022.
"I know I need to diversify from Tesla, but if I sell now I'll owe thousands in capital gain taxes. Plus, you know, Elon.”
They choose taxes and decide not to sell, rather than taking the win and diversifying out of a 100-bagger. What's happened to TSLA since?
Tesla has underperformed T-bills by more than that 15% tax rate, as well as the broader market by significantly more than the top Federal long-term capital gains rate of 23.8%. Even at a cost basis of zero, it still would have made sense to sell Tesla and reinvest those after-tax proceeds.
Remember that portfolio drawdowns are on what you have, tax liabilities are only on what you've earned. What Tesla's recent performance highlights is that it doesn't take much, and sometimes it doesn't take long, for the math to favor just selling the winning position. Whether those after-tax proceeds were reinvested into the S&P 500 (more diversified) or Treasury bills (less risk), the relative performance gap has more than made up for that tax bill.
Think about it this way: if we sell that position and pay the capital gains tax, what does my relative recovery rate need to be to get back to where I was before? How much does the investment I bought with after-tax proceeds need to grow in order to breakeven?
Source: Triad Wealth Partners
The table above assumes a current value on your investment of $100k. So for example, if you 5x a position from less than $17k to $100k, you need only gain, or at least outperform the security you sold, by 14.3% on those after-tax proceeds (assuming you're in the 15% long-term capital gains tax bracket) to get back to even.
But you're still not "even", in fact you could argue you're still ahead on several fronts from selling.
Why? Not only has your portfolio risk likely decreased due to less concentration in that stock, but your cost basis has been reset higher.
Now any subsequent capital gain realizations are from a larger denominator, potentially reducing your next capital gain tax liability.
"But what if my stock continues to outperform the market? I'd hate to miss out on even more upside."
That's the risk you take, and yes you would have a larger portfolio if that scenario continued to play out (plus some bragging rights). But at what cost? You're concentration risk is getting worse while you're taxable gain is getting larger and larger, potentially making you even more hesitant to de-risk or diversify. Once again, you're choosin' taxes.
The lesson here is partly that we should think critically before over-prioritizing saving on taxes when it comes to investing, but also that sometimes the simplest solution is the optimal solution. Selling may not sound like the smartest idea, until you do the math.
Brent Coggins, Chief Investment Officer
Triad Wealth Partners
The Tesla example and accompanying table are hypothetical illustrations only and do not reflect the performance of any actual client account or Triad Wealth investment strategy. They are intended solely to illustrate the mathematical relationship between capital gains tax liability and investment performance, not to predict or project results for any specific security or client. Actual results will vary based on individual tax circumstances, cost basis, holding period, and market conditions. This illustration should not be construed as a recommendation to buy, sell, or hold any security, including TSLA.
Comparative period shown (January–September 2026) was selected to illustrate a specific point about relative performance and is not representative of TSLA's, the S&P 500's, or T-bills' performance over other periods, including the period since TSLA's 2010 IPO referenced above. The S&P 500 and T-bill indices are unmanaged and not available for direct investment; index returns do not reflect the deduction of fees, expenses, or taxes an investor would actually incur.
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