IPOs and the excitement surrounding them tend to bring out investors’ emotional biases. Fear of missing out on big potential gains, excitement over the “hot stock” everyone’s talking about, or the optimistic belief that a company’s recent growth means more is coming—these can all influence an investor’s decision-making process.
When a well-known company finally goes public, investors are presented with an opportunity to participate in a story they’ve likely been following for years. Recently, SpaceX and other big names have generated significant attention, with many investors eager to gain exposure before the next potential chapter of growth unfolds.
If you do decide to buy, it’s worth understanding the mechanics behind an IPO and the volatility that tends to come with it. There are ways to both participate in an exciting event like an IPO and consider your long-term financial well-being at the same time. The key is to be strategic, think with a clear head, and keep the potential tax consequences of large gains in mind.
The Nature of IPO Pricing
When a company goes public, it establishes an initial offer price for its shares. That’s all well and good. But once public trading begins, the market ultimately determines what investors are willing to pay. Shares often begin trading at a different price from the original IPO offering price.
A highly anticipated IPO might surge immediately. Other times, shares open flat or even decline. While there’s plenty of excitement surrounding a new public offering, no one knows exactly how the market will respond once trading begins.
Remember, recently IPO’d companies are still relatively early-stage businesses. They’ve demonstrated impressive growth, but they haven’t yet established a consistent path to profitability.
Take Uber as an example. Despite being one of the most recognizable companies to go public in recent years, the stock initially struggled to meet expectations. It took roughly five years after its IPO to achieve profitability. Since going public, it’s actually lagged behind the S&P 500.
Even exciting companies can experience significant volatility and long periods of uncertainty before their business results fully catch up to investor expectations (though there’s no guarantee they ever will).
Preparing for IPO Volatility with Strategic Asset Location
Considering where an investment should live within your portfolio is a commonly overlooked strategy called “asset location.” Different types of accounts carry different tax treatments and consequences. Investors can pair tax-efficient or inefficient assets with the accounts that will best complement their attributes.
For example, a Roth IRA allows qualified growth and withdrawals to occur tax-free. Tax-deferred accounts, such as traditional IRAs, generally allow investments to grow without immediate taxation, with taxes deferred until funds are withdrawn.
Investments with the potential for substantial appreciation are often well-suited for these types of accounts. If an IPO investment performs well, future gains may be shielded from current taxation or deferred for years, depending on the account structure.
When capital gains are realized in a taxable account, they can create an immediate, sizable tax bill. Frequent trades may also be considered taxable events and reduce after-tax return.
Tax-sheltered accounts mitigate tax drag and allow more of the investment’s potential growth to remain invested over time.
That said, an asset location strategy doesn’t make the investment itself safer for your portfolio. Risk and volatility still exist regardless of what account the investment lives in. A company can still disappoint investors, miss expectations, or experience sharp price swings. Rather, considering different account types and their tax characteristics gives you the ability to better control the eventual tax outcome.
When Do Taxable Accounts Make Sense?
Taxable accounts may still be suitable in certain situations, especially if you have access to a tax-reduction wrapper plan such as a long/short strategy.
A long/short strategy can be used to offset gains by intentionally realizing losses elsewhere in the portfolio. Tax-management strategies like this give investors greater flexibility when deciding where to hold a high-growth IPO allocation.
Want to Take Part in the Next IPO?
Investment performance impacts returns, naturally. So does the tax treatment, which can differ depending on where you choose to house investments with significant growth potential.
If you’re tempted to take part in a recent or soon-to-come IPO, consider both the investment opportunity and the tax implications. Strategic decisions, including asset location, can help position your portfolio to keep more of what you earn, especially if the investment succeeds.
Let’s talk before you buy. Schedule a complimentary consultation, and we’ll look at both the opportunity and the tax treatment together.
Sean Gerlin, CFP®, CPWA®, ChFC®, CLU®, is the Founder and Principal of Envision Wealth Planners, a fee-only financial advisory firm serving clients across Central Florida, including Orlando, Winter Park, Maitland, and nearby communities. In 2025, he was honored with both the Wealthtender Voice of the Client Award and the Best of BusinessRate 2025 award, recognizing his commitment to exceptional client experience and long-term relationship-focused planning. Sean specializes in helping high-income families, business owners, and commercial real estate executives align their wealth with their values through a comprehensive Financial Life Planning approach. Learn more about EWP at envisionplanners.com.
This material has been edited with the assistance of artificial intelligence tools. The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.