If you’ve held stocks that have appreciated significantly, selling them can create a tax nightmare. The minute you sell those shares, the IRS comes knocking. They want a large slice of your gains, and the law says they are entitled to it. But what if you could legally defer those taxes, keep more of your money working for you, and invest all the proceeds the way you want to?
You can do that. If you’re looking for a smarter exit strategy from stocks, especially in today’s volatile markets, here’s a solution worth considering.
Understanding the Capital Gains Tax Problem
When you sell appreciated stocks, you owe capital gains tax on the difference between your cost basis and the sale price. If you’ve held the stocks for more than a year, the gain is classified as long-term, taxed at 0%, 15%, or 20%, depending on your income.1 Short-term gains (less than a year) are taxed at your ordinary income rate, which could be significantly higher.
Now, consider what happens if you’re sitting on a $1 million gain in tech stocks. Sell outright, and you could owe $200,000 or more in federal and state taxes. That means a fifth of your wealth is gone before you reinvest a dime.
Instead of selling the stocks directly and handing over a chunk to the IRS, you use a Deferred Sales Trust (DST) tax structure. Doing so allows you to postpone the taxes and have more control over how and when you pay.
How a DST Works With Stock Sales
A DST is a legal, IRS-compliant strategy that allows you to defer the recognition of capital gains, meaning you don’t have to pay capital gains tax immediately when you sell highly appreciated assets like stocks.
Instead of selling the assets directly and triggering a taxable event, you sell them to a DST, which then sells the assets on your behalf. Because the trust, not you, receives the proceeds, the capital gains tax is deferred, giving you greater flexibility over when and how you pay.
This approach can help preserve more of your wealth, provide opportunities for reinvestment, and allow for a more strategic, long-term approach to deferring capital gains tax on stocks and managing your gains.
Setting up a DST involves a few key steps:
- Consult with a DST advisor who can assess whether a DST fits your financial goals.
- Establish the trust. An attorney drafts the DST documents and ensures the structure complies with IRS rules.
- Sell your appreciated asset to the trust. This could include stocks, real estate, or other investments with substantial gains.
- Sell the asset through the trust, deferring capital gains since you haven’t received the funds directly.
- Receive payments from the trust over time, reinvest the proceeds into new opportunities, or allow them to grow inside the trust for future strategic withdrawals.
Let’s revisit the $1 million gain example. If you sell directly and pay 20% in taxes, you have $800,000 to reinvest. However, if you use a DST, you defer that tax and retain the full $1 million to work for you immediately. That additional capital could yield tens or even hundreds of thousands more over time.
Why a DST Is Especially Useful for Stock Investors
People generally associate DSTs with real estate, but it’s just as effective for stocks and other highly appreciated assets held outside of retirement accounts.
If you own concentrated stock positions (like company stock from an IPO or years of compensation) and you’re worried about market volatility or diversification, a DST gives you the flexibility to sell strategically without triggering immediate taxation.
It also works well when you want to transition from active investing to a more passive income structure, reallocate your portfolio without incurring penalties for large gains, or use the trust to invest in other vehicles such as real estate or diversified funds.
By deferring your tax bill, you can preserve liquidity and build wealth more efficiently.
When You Should Consider a DST for Your Stocks
A DST isn’t a one-size-fits-all solution. They are best if you have large, highly appreciated positions, typically yielding gains of $1,000,000 or more. Using a DST doesn’t eliminate your tax liability; it defers it. You’ll pay taxes as you receive payments from the trust. But you control the timing and structure of those payments, which gives you far greater leverage over your financial future.
Because DSTs involve complex IRS rules, understanding the mechanics and potential benefits is only part of the equation. Properly setting up a trust requires expertise to ensure compliance, tailor the payment structure to your financial goals, and maximize the deferral benefits.
Working with a professional team that specializes in DSTs is critical here. The IRS has very specific rules about how these transactions must be structured, and one misstep can make the difference between triggering a major tax event or enjoying a well-strategized wealth tax plan.
Don’t Let Taxes Dictate Your Financial Future
Capital gains tax doesn’t have to be the cost of your success. With tools like a DST, you can protect your gains and deploy your wealth with greater precision.
Whether you’re a seasoned investor or simply managing a significant portfolio, don’t leave your stock exit strategy up to chance. Consult with a professional who understands DSTs and can help create a customized plan tailored to your goals.
1https://www.irs.gov/taxtopics/tc409