An OpenAI employee with $5 million in Private Profit Units (PPUs) will soon face a $1.8 million tax bill from federal and California capital gains taxes once liquidity occurs - since the cost basis is effectively zero.

We talked about a few key strategies to mitigate this:

1. Offset Gains with a Long/Short Equity SMA

A long/short tax-loss harvesting SMA can systematically realize capital losses to offset gains from the liquidity event.

• These accounts can harvest losses exceeding 90% of portfolio value in year one.

• Because unused losses carry forward indefinitely, it’s advantageous to fund the account now with existing brokerage assets to begin accumulating losses ahead of the liquidity event.

• Additional proceeds from the PPUs can then be added post-liquidity for continued tax optimization.

2. Recycle Real Estate Gains Using Depreciation

The client also owns two triplexes they plan to sell. These sales will trigger both capital gains and depreciation recapture.

We can reinvest proceeds into specialized real estate funds designed with front-loaded depreciation - allowing them to offset both categories of taxable gains while shifting from active property management to a passive, diversified structure.

3. Add Diversified, Tax-Aware Income Strategies

Finally, layering in tax-aware hedge funds provides uncorrelated return streams while passing through ordinary lossesthat can offset earned income - improving after-tax performance and reducing overall portfolio risk.