Wealthy Investors Pour Billions Into Tax-Aware Long-Short Strategies

According to CNBC, wealthy investors have pushed assets in tax-aware long-short strategies, or TALS, to more than $170 billion from $2 billion in 2022, even as tax experts warn of risks and possible scrutiny from tax authorities. The strategies aim to track equity indexes while generating tax losses that can offset capital gains taxes, and demand has risen among high-net-worth investors, business owners, executives with concentrated stock positions and employees with stock from recent IPOs. Bob Casey, CEO of Santa Barbara Management, said the products are highly profitable and sticky for the wealth management industry. He said a $1 million portfolio could generate $250,000 in capital losses in the first year, and that those losses could be worth up to $137,500 for a California investor offsetting short-term capital gains. Tax attorneys said Treasury officials warned earlier this summer at a Wall Street Tax Association seminar about aggressive planning involving products that generate tax losses. They said the Treasury has not declared the practices illegal, but has put Wall Street on notice and could issue new guidance, ban the products or make no changes. Advisors also warned that exiting the strategies can trigger realized gains, that the products can involve leverage and tracking error, and that fees can range from 1% to 3% of the portfolio.