First, what is a pre-paid variable forward (PVF)? A pre-paid variable forward is a financial contract that allows investors with a large, concentrated stock position to access liquidity today while potentially deferring the capital gains tax that would otherwise come due in the year of a sale. For executives and long-tenured employees sitting on a significant embedded gain, it is a strategy worth understanding in some depth before deciding whether it belongs in your plan.

How Does a Pre-Paid Variable Forward Contract Work?

Under the contract, the investor agrees to deliver a variable number of shares to a financial institution at a future date, typically two to five years out, in exchange for a lump-sum cash payment today. That payment generally represents 75 to 85 percent of the position’s current market value depending on the terms negotiated. Because the investor is entering into a forward delivery contract rather than selling shares outright, a taxable sale is generally not triggered at the time of the transaction under current IRS rules, though the specific tax treatment depends on how the contract is structured. The gain is generally deferred until shares are delivered at settlement.

The number of shares delivered at maturity depends on where the stock price lands:

• If the stock appreciates significantly, more shares are delivered, capturing some but not all of the upside
• If it declines, fewer shares are delivered, providing a degree of built-in downside protection
• The investor exchanges some upside participation for immediate liquidity and a deferred tax clock

What Are the California Tax Implications of a Pre-Paid Variable Forward?

For California residents, where capital gains are taxed as ordinary income at rates up to 13.3% with no preferential long-term rate at the state level, deferring a large gain even by two to three years can be meaningful in dollar terms. The combined federal and California rate on long-term gains can reach 37.1% for high earners, and the difference between recognizing that liability today versus in a future year, when income may be lower or other planning tools can be deployed, is worth understanding carefully. California conforms to the federal open transaction treatment of PVFs in most cases, meaning the state tax may also be deferred until settlement, though this warrants careful review with a tax professional given the complexity involved.

Can You Combine a Pre-Paid Variable Forward With Direct Indexing?

One of the more compelling aspects of a PVF is how it may work alongside other tax strategies. The cash received upfront does not have to sit idle. Many investors deploy those proceeds into a direct indexing or long-short tax-aware strategy specifically designed to generate harvested losses over the contract period. Those losses may then be used to help offset the capital gain that becomes taxable when shares are delivered at settlement, and for investors managing a concentrated position over time, the two strategies can serve complementary roles within a broader plan.

When thoughtfully paired together, a PVF and an appropriately leveraged long-short tax-aware strategy can provide meaningful tax savings for those looking to diversify concentrated low-basis stock positions. See this recent research paper that examines this strategy in detail.

What Are the Risks and Downsides of a Pre-Paid Variable Forward?

A PVF is not without meaningful complexity and tradeoffs. Key considerations before moving forward include:

• The contract locks in a delivery obligation on a specific stock, and positions subject to insider trading restrictions or Rule 10b5-1 plan requirements need careful legal review before structuring
• The financing embedded in the contract carries an implicit cost that reduces the effective upfront payment
• The investor retains the full tax liability on the deferred gain regardless of what the stock does between now and settlement, meaning a significant decline in the stock price does not reduce the tax owed
• These contracts are generally available only to investors with positions above a meaningful minimum size and require a creditworthy institutional counterparty

Who Is a Pre-Paid Variable Forward Best Suited For?

A PVF may make the most sense for investors with a large, low-basis position in a single stock who need or want liquidity in the near term but are not ready to absorb the full tax cost of an outright sale. For California residents managing concentrated positions alongside ongoing RSU vesting or an anticipated liquidity event, bringing this tool into the planning conversation early tends to create more options than addressing it after the fact. At Traveka Wealth, we work with clients across Los Altos and the Bay Area to think through concentrated position strategies with a full picture view. If you are sitting on a large position and exploring your options, reach out to our team for guidance.

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