Rich Investors Bet Billions on Risky Tax Trick to Cut Their Bills

Wealthy investors are pouring billions into a new tax-saving strategy — but experts say many don't understand the risks.

The strategy is called tax-aware long-short (TALS). In simple terms, it's an investment designed to legally create paper "losses" that can lower the tax bill on real profits. Money invested in these products jumped from just $2 billion in 2022 to more than $170 billion today.

Why the rush? After three strong years in the stock market, many rich people are sitting on huge capital gains (profits from selling investments that get taxed). They want a way to shrink the taxes owed.

Here's how it works with a simple example:

• A $1 million investment could generate $250,000 in tax losses in the first year.
• For a California investor, those losses could be worth up to $137,500 in tax savings.

But experts warn about four major risks:

• IRS scrutiny: U.S. Treasury officials recently warned about "aggressive" tax products. They haven't banned TALS, but they're watching closely — meaning rules could change.
• Hard to exit: These are really tax deferrals (delaying taxes, not erasing them). When you try to cash out, all those postponed gains can hit you at once, creating a surprise tax bill.
• Very complicated: One account can involve thousands of individual stock bets, borrowed money (leverage), and short positions (bets that a stock will fall). Even experts struggle to fully understand them.
• High fees: The complexity lets wealth managers charge big fees. As one expert put it: *"Complexity is a feature, not a bug."*

The most popular version uses a "130/30" ratio — for every $100 invested, an extra $30 is borrowed to boost returns. That means investors are taking on more risk than they may realize.

The bottom line: These products can save serious money for the ultra-wealthy — especially those who plan to donate stock or pass it on after death. But without a clear exit plan, investors could end up "back in the same place" with a hefty tax bill.

This is an AI-generated summary. Read the original article at: https://www.cnbc.com/2026/09/11/wealthy-investors-tax-aware-long-short-strategies.html