The biggest trend in family office and private wealth over the past few years has been the rise of so-called tax alpha.
Tax alpha is an umbrella term that refers to a variety of investment products and planning strategies that are designed to help ultra-high net-worth investors defer large tax bills over time. Most of the core strategies are not new and are generally accepted by the IRS. Even retail investors can access automatic tax loss harvesting from a roboadviser.
However, a subset of strategies requiring higher minimum investments and a more complex approach to tax deferral have recently seen significant growth led by systematic hedge fund managers who have been able to offer products at scale. Billions of investor dollars aimed at these products are flowing to big managers including AQR, Quantinno, and Dimensional Fund Advisors. Earnings data from Affiliated Managers, the parent company of AQR, shows that firm assets were $189 billion at year-end, increasing by $75 billion in 2025, driven in part by the firm’s long/short tax-aware funds. According to estimates from Tax Alpha Insider, 116 ETFs have launched using 351 exchanges amounting to approximately $21 billion in assets.
These strategies are not just popular with family offices and ultra-high-net-worth investors. They have recently caught the attention of the Internal Revenue Service.
A Warning, Followed by Formal Guidance
At this summer’s Wall Street Tax Association Seminar, Treasury officials warned that investors and advisers should be wary of overly aggressive deferral strategies. Those comments were informal but caught the attention of many in the adviser space that were already skeptical of the tax-aware frenzy. Then at the end of September, those informal comments were echoed in a formal notice from the IRS.
IRS Notice 2026-62 and Rev. Rul. 2026-20 offer some of the strongest warnings yet for investors and advisers considering tax alpha strategies. In the notice, the IRS says explicitly that these “novel investment fund strategies” purport to produce tax results that “are not the result of conventional, long-established tax planning that is consistent with the intent of Congress.”
IRS opened a comment period that is open until October 28 and reported that it could provide additional guidance or take other action to reign in tax-alpha products.
According to the notices, what’s at issue is the growing use of 351 Exchange ETFs to defer taxable gains on large groups of stocks. ETF rules were amended in 2019 to allow investors to transfer appreciated stocks or ETFs into a newly formed ETF in exchange for shares. This exchange allows investors to defer the taxable gains by relying on the existing tax optimized wrapper of the ETF. Alongside the use of 351 exchanges, the IRS is also taking a closer look at long/short tax loss harvesting of the sort done by hedge funds like AQR. These funds use a combination of leverage and a straddle option strategy to offer their long/short tax lost harvesting structure. In the notices, the IRS says “straddles that use offsetting positions to generate gross capital gain and ordinary loss” may not be in-line with the Congressional intent governing existing tax rules.
The Role of Congressional Intent
The focus on Congressional intent in both notices is an important one. Tax loss harvesting as a practice and tax optimizing portfolios in general are routine and accepted by the IRS. These are established, and in many cases, mechanical practices in portfolios and within the ETF structure itself. Tax optimization is a core value proposition of the ETF wrapper. Congress is also open to other tax optimization stratgies. Real estate investing has a number of ways to manage depreciation and operating costs in ways that help offset taxable events elsewhere in a portfolio. Even as recently as the One Big Beautiful Bill Act of 2025, Congress moved to codify another tax deferral strategy–Opportunity Zone Funds–and in doing so offered investors in those funds more options for tax deferral and bigger bonuses.
Risks increase, however, when asset managers and advisers start to push the envelope. “I think we’re seeing some of this come to a head because of the amount of money going into these strategies over a relatively short time,” says Brent Sullivan, an independent tax analyst and founder of Tax Alpha Insider. “There are just a lot more ultra high net worth investors and they are looking for offsets. That creates incentives and you start to see a bunch of things come to market and not all of it is high quality. Some of it is pretty cringe frankly.”
Sullivan says that further guidance is likely to be beneficial because investors have to sort through the ‘cringe’ strategies and ones where the teams behind them can show their work and have a clear business case that lines up with existing rules around tax optimization. Warnings like the notices issued at the end of September could have the power to de-cringe this part of the market.
That clarity could be beneficial for investors. Eric Gerster, CIO at AlphaCore Advisors, an advisory firm focused on family offices and ultra-high-net-worth investors, says that whether tax alpha strategies work for a given portfolio at all is entirely based on the facts and circumstances unique to any specific investor. “There are strategies that we wouldn’t recommend because we do think they’d come with increased IRS scrutiny,” he says. “And for the others that could provide value, it’s really important to understand how they work and what the implications are for liquidity over the life of the portfolio. You’re not getting out of paying taxes, you’re deferring them.”
These notices could be paving the way for a similar evolution to what happened with Opportunity Zone Funds. The first version of Opportunity Zones, rolled out in 2017, during the first Trump administration, to mixed success. The highest performing funds came from developer teams with existing track records in real estate. However, a number of others offered investors a tax deferral strategy without the real estate knowhow behind it. Nearly a decade later, investors are finding out that tax deferral is less beneficial than they had hoped . The rule changes made by Congress last year aim to mitigate some of these risks going forward. Lackluster performance on the part of some funds will also likely keep some of the worst performers out of Opportunity Zones 2.0.
New Rules?
The question for ultra-high-net-worth investors is where tax alpha is ultimately headed. If there is a clear, documentable business case behind tax alpha products – the Trump administration has made it clear that wealth creation/preservation is a core goal of its policies. But, more investors than ever before are looking for ways to offset taxable gains, which can have a material impact on federal revenue collections.
Rob Arnott and Robert Jeffrey first identified this tension in a 1993 paper entitled “Is Your Alpha Big Enough to Cover Its Taxes?” In it, Arnott and Jeffrey explained that for taxable investment accounts, the ability of investment managers/advisers to add value by reducing clients’ tax exposure is a more valuable service for high-net-worth investors than the quest for alpha itself.
Arnott says that reality has only increased over time. “I think we’re going to see the use of these strategies evolve,” he says. “There is significant potential to use technology to mechanize a lot of this and make it clear and straightforward for both investors and the IRS. The use of loss harvesting is already mainstream–even the IRS agrees it’s mainstream. And it increases money flow from one investment to another. That’s healthy for the market.”
Tags: Alpha, family office, Internal Revenue Service, investment strategies, ultra-high net worth