When Avoiding Taxes Becomes the Bigger Investment Risk
There’s an age-old saying on Wall Street that no one ever went broke taking a profit. Like most clichés, this one oversimplifies the dilemma investors face when they sit on substantial unrealized gains during a bull market.
Many investors refuse to sell appreciated stocks because they don't want to pay capital gains taxes. The problem is that the tax bill they're trying to avoid may be far smaller than the losses they risk by continuing to hold a highly appreciated position. But at some point, an investment gain stops being merely a number on an account statement and becomes wealth worth protecting—even if it means paying taxes.
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Another common idiom is that the stock market can remain irrational longer than you can remain solvent—meaning those who actively bet against a bull market may have to wait a long time to cash out. But periods like this are precisely when it can be useful to revisit whether a portfolio has become overly dependent on a small number of stocks or a particular theme than originally intended.
For many investors who have seen the shares of some of their longest held stocks appreciate significantly, the reluctance to sell often has less to do with their conviction in the stock and more to do with their desire to avoid capital gains taxes. And that distinction matters because when it happens, the tax tail has officially begun to wag the investment dog.
For instance, an investor who managed to accumulate $250,000 worth of Oracle stock in December 2019, when the shares were trading around $49, would have seen its market value reach $1 million by the end of 2025 when its shares were trading around $195. At that point, the investor would have been sitting on an unrealized gain of $750,000, and selling the entire position would have meant generating a meaningful tax bill. Thus, the investor likely would have defaulted to doing nothing.
What makes the subsequent decline more notable is that Oracle had briefly surged above $300 per share in September 2025, reaching an intraday high of nearly $342 as enthusiasm around its artificial intelligence and cloud-computing prospects intensified. But by Mid-October, investor sentiment around the stock was beginning to shift, momentum had begun to reverse, and shares were falling sharply from those highs.
For a long-term shareholder sitting on a substantial gain, that kind of reversal should at least prompt a reassessment of your overall thesis. The market was signaling that the extraordinary optimism that had pushed Oracle’s shares higher was no longer so cut-and- dry.
But by the end of September of 2026, Oracle’s shares had fallen to roughly $137, which represents a decline of nearly 29% from where they ended the year prior. As a result, that $1 million position would have fallen to approximately $711,000 in just nine months, simultaneously wiping out approximately $289,000 of its market value and reducing the investor’s unrealized gain from roughly $750,000 to $461,000.
This is where the math behind avoiding capital gains taxes becomes more complicated. The investor may have successfully postponed writing a check to the IRS, but by doing so, they remained exposed to one of the most volatile stocks in the market.
Now consider the alternative. Even if the investor were subject to the highest federal long-term capital gains rate of 20%, and they sold the entire position at the end of 2025, the tax on the $750,000 gain would have been approximately $150,000. That would have left them with roughly $850,000 after federal capital gains taxes, which is about $140,000 more than the value of the position after Oracle's subsequent decline.
Although the investor would have triggered a six-figure tax bill by selling, they still would have ended up with considerably more cash in their pocket than they did by focusing solely on avoiding capital gains taxes. That is not to say that an investor with significant gains should always be looking to sell. But this is the part of the calculation investors often overlook.
The relevant comparison is not simply between paying taxes and paying no taxes. It is between the known cost of realizing a gain and the potentially much higher cost of continuing to expose that gain to market risk—especially when the gain is tied to the stock of a company that has seen its shares appreciate rapidly over a short period of time.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your tax and legal advisors before taking any action that could have tax and legal consequences.
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