Direct Indexing in Texas: The 23.8% Math and Who It Still Works For

Texas investors hear a familiar question: "Does direct indexing even make sense here?" At a 23.8% combined federal rate — no state income tax means no state capital gains either — each harvested dollar saves less than it does in California or New York City. The break-even hurdle is real. But for four specific groups — energy professionals with lumpy K-1 gains, California transplants with RSU vesting, tech executives at Austin's major campuses, and concentrated-stock holders — direct indexing still generates meaningful after-fee wealth even at the lower rate. This guide shows the math honestly and identifies where the Texas case is compelling and where it isn't.

The Texas capital gains rate stack

Texas imposes no state income tax and no state capital gains tax of any kind. Long-term capital gains are taxed exclusively at the federal level.¹

The 23.8% combined rate is the floor for wealthy Texas investors — the same number that investors in every no-income-tax state face. By comparison, top-bracket California investors pay 37.1%, a 56% higher rate on the same gain. This difference is real and changes the DI calculus substantially, but it doesn't eliminate the case for DI — it just raises the bar.

State comparison: Texas vs. high-tax states

Does direct indexing break even in Texas?

The core DI economic question is whether annual tax alpha — harvest rate × tax rate — exceeds the platform fee premium over a low-cost ETF. In Texas, with a 23.8% rate, the numbers are tighter than in high-tax states.

Break-even assumes 0.25% annual fee premium of DI platform over a low-cost ETF (e.g., Schwab DI at 0.40% vs. Vanguard Total Market ETF at ~0.03%). Harvest rates vary with market volatility. In active markets, harvest rates of 1.5–2.0% are achievable; in flat markets, they may fall below 1.0%.

The break-even harvest rate in Texas at a 0.25% fee premium is 1.05% per year. In California, the break-even is only 0.67%. This means Texas investors need more market volatility — or a lower-cost platform — to capture the same net benefit that California investors get more easily.

Annual dollar benefit by portfolio size: Texas vs. California

At a 1.5% harvest rate and 0.25% fee premium, Texas investors still build meaningful absolute dollar savings at larger portfolio sizes — just less than in California.

Assumes 1.5%/year harvest rate and 0.25% DI fee premium over ETF. Actual harvest rates vary with market conditions. At $5M, a Texas investor still keeps roughly $5,350/year after fees — comparable to what a $1.75M California portfolio generates. The absolute dollar benefit is real at larger portfolio sizes, even if the percentage return is lower.

When direct indexing still makes clear sense in Texas

1. Energy sector: MLP K-1 income and equity compensation

Houston and Midland energy professionals face a category of capital gain that's both large and unpredictable: K-1 income from master limited partnership (MLP) investments. Unlike W-2 income, MLP K-1 allocations arrive late (often February or March), include complex character breakdowns — §1231 gains, §1250 recapture, ordinary income reallocations — and can generate capital gain events well into six figures in any given year.

Energy company equity compensation (ExxonMobil, ConocoPhillips, Pioneer (now ExxonMobil), Halliburton, Schlumberger, Enterprise Products Partners for directors) creates a similar dynamic: large tranches of RSU vesting or performance unit payouts that, once they become long-term capital gains at disposition, generate six-figure LTCG events at 23.8%.

For these investors, the DI strategy is straightforward: build a loss bank in the two to three years before a known large K-1 realization or stock sale. A $2M DI account generating 1.5% in annual harvesting creates a $30,000 loss bank each year. Deployed against a $250,000 MLP capital gain event, those losses reduce the tax bill by $7,140 in a single year — net of any fee premium, that's clear economic value.

2. California transplants with RSU vesting

Austin's tech growth has attracted thousands of former California residents who relocated from the Bay Area, Los Angeles, and San Diego — often keeping their jobs at California-headquartered companies (Apple, Google, Oracle, HP, Tesla, Salesforce). These investors face a nuanced transition:

• California can still tax RSU vesting income if California-sourced — if the RSU grant period partly occurred while you were a California resident, California apportions that W-2 income. Consult a tax professional on your specific grant history and domicile date.
• Future appreciation on vested RSU shares is taxed where you're domiciled at sale. Once shares are fully vested and you've established Texas domicile, appreciation from vest price to sale price is a Texas LTCG — taxed at 23.8% rather than 37.1%.
• The loss bank strategy still applies. A CA transplant who started a DI account in 2021-2022 (when technology stocks fell sharply) built substantial carryforward losses. Those losses travel with the investor and can now be deployed against Texas-rate gains — a meaningful asset even at the lower rate.

3. Austin and Dallas tech executives

Texas is now home to major technology campuses with thousands of highly-compensated employees. Dell Technologies is headquartered in Round Rock; Oracle relocated its headquarters to Austin in 2021; HP Enterprise has its headquarters in Houston; AT&T, American Airlines, and ExxonMobil (Irving) drive additional high-income HNW households in the Dallas–Fort Worth area; Tesla's Gigafactory employs thousands of engineers in Austin; and Apple, Google, and Amazon have large Austin and Dallas offices.

For these employees, the RSU holder strategy is the same as in other states — build a loss bank, configure an employer-stock exclusion screen, use DI losses to offset gain-recognition events from selling older RSU tranches. The specific consideration in Texas: because the combined rate is 23.8%, the minimum threshold where the math is clearly positive is roughly $500K in taxable assets with a well-run, low-cost DI account.

4. Business founders with §1202 QSBS or non-QSBS proceeds

Texas conforms entirely to federal §1202 QSBS rules (there is no state income tax to apply different treatment, unlike California's notorious QSBS nonconformity problem). A Texas-domiciled founder who satisfies the OBBBA-enhanced 100% QSBS exclusion at the 5-year hold threshold owes zero federal or state capital gains tax on that portion.²

Where DI matters for Texas founders:

• Non-QSBS proceeds (excess above the $15M OBBBA cap, non-§1202-eligible securities, earnout payments): taxed at 23.8% with no state-level mitigation. DI losses offset these gains directly.
• Earnout payments taxed as ordinary income: DI cannot directly offset ordinary income. See the business sale guide for the full character analysis.
• Pre-exit loss bank for founders 3+ years from exit: building a DI loss bank before a planned exit is a standard advisory strategy regardless of state. At 23.8%, the after-fee payoff requires 3-4 years of loss accumulation to match what a California founder captures in 2 years — but the mechanism is the same.

When direct indexing probably doesn't make sense in Texas

The lower rate creates situations where DI doesn't clear the economic hurdle:

• Portfolio under $500K with no specific gain event to offset. At $250K, the net annual benefit after fees is under $300/year — marginal against the complexity and platform minimums. If no large gain event is anticipated, a low-cost ETF outperforms DI at this portfolio size in Texas.
• Investors in the 15% LTCG bracket. Combined rate of 18.8% (NIIT + 15%) generates even less tax alpha. The break-even harvest rate with a 0.25% fee premium is over 1.3%/year — achievable only in volatile markets.
• Simple portfolios without equity comp, K-1 income, or concentrated stock. Straight index investing via ETFs is cheaper and not meaningfully worse if there is no specific planning interaction that a DI account enables.
• Short time horizons. DI generates the most value when you hold the program for 5+ years and repeatedly defer and compound the deferred gains. A 2-year holding period in a low-volatility market likely won't recover the setup costs and fee premium in Texas at the lower rate.

No Texas estate tax: how it changes the §1014 strategy

Unlike Oregon (where estates above $1M trigger a state estate tax) or Massachusetts (where estates above $2M do), Texas has no state estate tax. Combined with the OBBBA's permanent $15M federal estate and gift exemption, most Texas HNW households will not owe any estate tax on assets passed to heirs.³

This changes the §1014 step-up calculus slightly. The step-up in basis at death eliminates embedded capital gains tax completely for the beneficiary — and in Texas, that eliminates only the 23.8% federal rate (not a combined rate of 37%+). For estates clearly under $15M federal, the estate-tax-motivated planning argument for DI ("harvest losses in life, step up gains at death") is weaker than in states with estate taxes. The DI strategy still makes sense for cash flow reasons — deferring gains is valuable regardless of what happens at death — but the estate-interaction story isn't as compelling in Texas as it is in estate-tax states.

Platform selection for Texas investors

Cost-efficiency matters more in Texas than in high-tax states because the margin between tax alpha and fee premium is narrower.

• Frec ($20K minimum, 0.09% fee): Lowest cost DI platform. At 0.09% versus an ETF baseline of ~0.03%, the fee premium is only 0.06% — meaning even a 0.25% harvest rate generates positive net alpha in Texas. Best for straightforward portfolios without complex equity comp or K-1 income. See our Frec review.
• Wealthfront ($100K minimum, 0.25% all-in including all investment costs): Automated and accessible. The all-in 0.25% fee is competitive in Texas; no advisor access, so not suitable if you have K-1 income or multi-account wash-sale complexity. See our Wealthfront review.
• Schwab Personalized Indexing ($100K minimum, 0.40%): Accessible entry point with advisor access option. Wash-sale monitoring is Schwab-internal only — a limitation for energy investors with MLP positions at another custodian. See our Schwab review.
• Vanguard Personalized Indexing (~$250K minimum, 0.20%): Low-cost advisor-coordinated platform. A good middle option for Texas investors who want advisor-level coordination without Parametric's premium price. See our VPI review.
• Parametric (advisor-only, ~$250K minimum, 0.20-0.35% platform fee): For investors with MLP K-1 income, multiple accounts, or employer-stock concentrated positions that require precise cross-account wash-sale monitoring. The higher fee is justified when the planning complexity is present. See our Parametric review.
• Aperio/BlackRock (advisor-only, ~$1M minimum): Institutional depth for large concentrated positions, ESG mandates, and energy-sector clients with complex stock holdings. Relevant for senior executives at publicly traded Texas energy companies with single-stock concentrations above $2M. See our Aperio review.

General principle for Texas: if you don't have K-1 income, concentrated stock, or an employer-stock wash-sale problem, a lower-cost self-service platform (Frec, Wealthfront) is the economically correct choice. If you do have planning complexity, the advisor-coordinated platforms often increase the harvest rate enough to justify their fees — turning a marginal break-even into a clear positive.

Sources

1. IRS Topic No. 409 — Capital Gains and Losses. 2026 federal LTCG rates: 0% / 15% / 20% at thresholds per IRS Rev. Proc. 2025-32. Top rate (20%) applies at taxable income above $545,500 (single) / $613,700 (MFJ). NIIT of 3.8% per IRC §1411 applies to MAGI above $200,000 (single) / $250,000 (MFJ). Texas imposes no state income tax; no state capital gains adjustment applies.
2. IRS — Qualified Small Business Stock Gains Exclusion (Section 1202). OBBBA (One Big Beautiful Bill Act, July 2025) permanently increased the QSBS exclusion cap to $15M and modified holding period thresholds (50/75/100% at 3/4/5-year holds). Texas has no state income tax, so the full federal QSBS exclusion applies with no state-level reduction (contrast with California's §18152.5 nonconformity).
3. Tax Foundation — Does Your State Have an Estate or Inheritance Tax?. Texas has no state estate tax and no state inheritance tax. Federal estate tax exemption: $15M per person in 2026 under OBBBA permanent increase. Amounts above $15M are taxed at 40% federal rate.
4. Tax Foundation — 2026 State Income Tax Rates and Brackets. Texas confirms as a zero-income-tax state for 2026. Overview of state capital gains treatment across all 50 states used for rate comparison table.
5. IRC § 1411 — Imposition of Tax (Net Investment Income Tax). 3.8% NIIT on net investment income including capital gains. Thresholds: $200,000 (single) / $250,000 (MFJ) — statutory, not adjusted for inflation. Applies to all U.S. investors regardless of state of domicile.
6. Texas Comptroller of Public Accounts — Texas Taxes. Confirmation that Texas imposes no individual income tax or capital gains tax. Texas does impose a franchise tax on businesses but this does not apply to individual investment portfolios or personal capital gains.

Federal LTCG thresholds and NIIT parameters verified against 2026 IRS Rev. Proc. 2025-32 and IRS Rev. Proc. guidance. Texas zero-income-tax status confirmed via Texas Comptroller. Break-even analysis assumes 0.25% DI fee premium over a low-cost index ETF; actual fee differentials depend on platform selection. Harvest rate estimates (1.5%/year) are illustrative — actual rates vary with portfolio size, volatility, and platform algorithm. This page is informational only and does not constitute financial, tax, or legal advice.