The RSU Problem
Why tech employees end up with dangerous concentration
Restricted stock units (RSUs) vest on a schedule — typically over 4 years — and are taxed as ordinary income at the vesting price. After vesting, the shares sit in your brokerage account as regular stock. For employees at companies like Apple, Google, Microsoft, Meta, Amazon, and NVIDIA, RSU vesting can represent 50–80% of total annual compensation.
The result: after 3–5 years at a high-growth tech company, many employees hold $500K to $5M+ in a single stock — with a low cost basis equal to the vesting price. Selling triggers a significant capital gains tax bill. Holding creates concentrated risk. Neither option is attractive.
The Concentration Trap: A Typical NVIDIA Engineer
Sell to Diversify
$476,000
Federal + NIIT capital gains tax
$2M in NVIDIA stock, $200K cost basis (vesting price). $1.8M gain × 23.8% (20% LTCG + 3.8% NIIT) = $428K federal. Add CA state at 13.3% = additional $239K. Total: ~$667K in combined taxes.
Hold and Build Around It
$0
Tax on the concentrated position
Keep the NVIDIA position. Use direct indexing to build diversified exposure around it (excluding NVIDIA). Use Embark's §721 SPV to generate income on the position without selling.
The Combined Strategy: Direct indexing builds the diversified portfolio (S&P 500 minus NVIDIA). Embark's SPV addresses the concentrated position. Together, the portfolio generates income, harvests losses, and defers the embedded gain.
How DI Helps RSU Holders
Three specific advantages for concentrated stock holders
Exclude your employer's stock from the index
If you hold $2M in NVIDIA and buy an S&P 500 ETF, you're adding another 4–7% NVIDIA exposure (its current index weight). Direct indexing lets you build the S&P 500 minus NVIDIA, ensuring your diversified portfolio doesn't double down on the same stock. This reduces your portfolio's single-stock concentration without selling a single share of the RSU position.
Harvest losses to offset RSU gains
When RSUs vest, the spread above your grant price is taxed as ordinary income — your employer handles this via withholding. But when you eventually sell vested shares, any appreciation above the vesting price is a capital gain. Losses harvested from direct indexing can offset these gains dollar-for-dollar. If you sell $100K of RSU shares with $30K in capital gains, $30K in harvested losses eliminates that tax entirely.
Build a tax-efficient complement portfolio
RSU holders often under-diversify because the tax cost of selling is so high. Direct indexing gives you a tax-optimized diversified portfolio alongside the concentrated position — harvesting 1–2% annual tax alpha on the diversified side. Over 10 years on a $500K direct indexing portfolio, that's $50,000–$100,000 in tax savings that can be reinvested.
What direct indexing can't do for RSU holders: It cannot generate income on the concentrated position, defer the embedded capital gain if you sell, or protect against a crash in your employer's stock price. For those needs, you need a strategy that addresses the concentrated holding directly.
HNW Strategies
Advanced direct indexing tactics for $1M+ taxable portfolios
For high-net-worth investors with $1M+ in taxable accounts, direct indexing becomes a sophisticated tax management tool with several advanced applications:
Multi-index strategy: Rather than a single S&P 500 direct index, HNW investors often layer multiple direct indexed portfolios — U.S. large-cap, U.S. small-cap, international developed, and emerging markets. Each layer provides independent tax-loss harvesting opportunities. When U.S. large-caps are up, international small-caps may be down, and vice versa.
Charitable giving integration: Direct indexing makes it easy to identify the most appreciated individual lots for charitable donation. Donating stock with the highest embedded gain to a donor-advised fund (DAF) eliminates the capital gain entirely while providing a full fair-market-value deduction. This resets the portfolio's cost basis profile, refreshing future harvesting opportunities.
Estate planning synergy: At death, assets in a taxable account receive a stepped-up cost basis under current law. This means all the harvested losses (which lowered cost basis) and all the deferred gains become irrelevant — heirs inherit at the current market value. Tax-loss harvesting over a lifetime, followed by a step-up at death, effectively converts deferred taxes into permanent tax savings.
Transition management: HNW investors often need to transition from legacy positions (inherited stock, old mutual funds, concentrated holdings) to a new portfolio structure. Direct indexing can absorb individual stock positions in-kind, avoiding the tax cost of liquidating and rebuilding. The platform integrates existing holdings into the index-tracking framework and optimizes around their cost basis.
For Concentrated Stock Holders: If a significant portion of your net worth is in a single stock (>25%), direct indexing alone is insufficient. It optimizes the diversified portfolio but does not address the concentration risk. Embark's §721 SPV is designed specifically for this — generating income on the concentrated position while deferring the embedded capital gain under Section 721(a) of the IRC.
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RSU Playbook
A step-by-step framework for tech employees with concentrated stock
For tech employees with both RSU-driven concentrated stock and additional investable capital, here's the integrated strategy:
Quantify the concentrated position
Calculate: (1) current value of employer stock, (2) original cost basis (vesting price × shares), (3) embedded unrealized gain, and (4) estimated tax if sold. This is the 'tax anchor' that constrains your options.
Open a direct indexing account for new investable capital
Use post-tax cash compensation, bonuses, and proceeds from future RSU sales to fund a direct indexing portfolio. Choose a benchmark that excludes your employer's stock. Begin harvesting losses immediately.
Use harvested losses to offset RSU sale gains
As you sell future RSU tranches (for liquidity or to reduce concentration), use accumulated harvested losses from the direct indexing portfolio to offset the capital gains. This makes the sales tax-efficient.
Explore a §721 SPV for the core concentrated position
For the large legacy RSU position you don't want to sell (due to tax cost or conviction), consider contributing it to an Embark SPV under §721(a). This defers the gain, preserves upside exposure, and generates income — without selling.
Donate most-appreciated lots to charity
If you're philanthropically inclined, identify the highest-gain lots from direct indexing and donate them to a DAF. This eliminates the embedded gain and resets cost basis, refreshing future harvesting.
This framework uses every available tax tool: loss harvesting (direct indexing), gain deferral (§721 SPV), charitable giving (appreciated lot donation), and income generation (SPV distributions). Each addresses a different piece of the tax puzzle.
Real-World Scenario
How a Google engineer with $3M in GOOG structures the portfolio
Profile: Senior Google engineer, 38 years old, based in San Francisco. $3.2M in vested GOOG shares (cost basis: $600K, embedded gain: $2.6M). $450K in cash from bonuses and savings. 401(k) maxed with $800K in target-date funds. Combined federal + CA state tax rate on LTCG: ~33%.
The problem: Selling the GOOG position triggers ~$858,000 in combined federal + state capital gains tax ($2.6M × 33%). The engineer wants income and diversification but doesn't want to give up a third of the position to taxes.
The solution architecture:
• Direct indexing ($450K) → Schwab Personalized Indexing, S&P 500 minus GOOG. Estimated annual tax alpha: 1.2–1.5% ($5,400–$6,750/year). Harvested losses bank against future RSU sale gains.
• Embark §721 SPV ($2M of GOOG) → Contribute $2M of appreciated GOOG to Embark's SPV under §721(a). $0 tax at contribution. SPV generates targeted 10%+ income ($200K+/year). Gain deferred. No forced diversification. No 7-year lockup.
• Hold remaining $1.2M GOOG → Retain direct ownership of remaining shares for liquidity and conviction. Sell small tranches annually to fund direct indexing additions, offset by harvested losses.
• 401(k) ($800K) → Keep in low-cost target-date ETFs. No direct indexing needed (tax-advantaged account).
Year 1 result: $200K+ income from Embark SPV, $5,400–$6,750 in tax savings from direct indexing, $0 in unnecessary capital gains taxes triggered. The entire portfolio is working — diversified portion harvests losses, concentrated position generates income.
FAQ
Questions about direct indexing for RSU holders and HNW investors
Should I sell my RSUs to fund a direct indexing portfolio?
It depends on the embedded gain. If RSUs recently vested and have minimal appreciation above the vesting price, selling and redirecting to direct indexing may make sense — the tax cost is low. If the RSUs have appreciated significantly (30%+ above vesting price), selling creates a large taxable event that direct indexing's future tax alpha may take years to recover. For large appreciated RSU positions, consider an Embark §721 SPV to avoid triggering the gain entirely.
Can I exclude my employer's stock from a direct indexing portfolio?
Yes — this is one of direct indexing's most valuable features for RSU holders. Every major platform supports stock-level exclusions. If you hold NVIDIA RSUs, you can build an S&P 500 direct indexed portfolio that excludes NVIDIA, preventing double concentration. The platform will reweight the remaining 499 stocks to maintain index-like characteristics.
How do I coordinate wash sales between RSU sales and direct indexing?
If your direct indexing platform sells shares of your employer's stock (as part of harvesting or rebalancing), and you acquire new RSU shares of the same company within 30 days (through vesting), this could trigger a wash sale. Most platforms can suppress trading in your employer's stock — enable this feature. Coordinate with your financial advisor to ensure RSU vesting schedules don't conflict with harvesting activity.
What's the difference between direct indexing and Embark's §721 SPV for RSU holders?
They solve different problems. Direct indexing builds a diversified, tax-efficient portfolio alongside your RSU position — harvesting losses and excluding your employer's stock. Embark's §721 SPV addresses the RSU position itself — you contribute appreciated shares to a partnership under Section 721(a), defer the embedded gain, and receive income from the SPV. Direct indexing is for the diversified portion; the SPV is for the concentrated holding.
RSU Holders
Direct Indexing Solves Half the Problem. Embark Solves the Other Half.
Direct indexing helps you build a diversified portfolio around your concentrated RSU position. Embark's §721 SPV generates income on the position itself — generating income without selling — without selling, without diversifying, and without triggering the capital gain.