5 High-Tax Scenarios Where Long/Short Strategies Can Add Value

Short-term gains, taxed at ordinary income rates, are among the least efficient forms of investment return. For those with alternative asset exposure, short-term gains can accumulate quickly and push total income into the highest federal tax brackets.

Tax-aware long/short strategies can be used to realize short-term capital losses. By intentionally capturing losses throughout the year, the strategy reduces overall taxable income, costing the investor less and improving the after-tax return on investment.

Even when capital gains qualify for long-term treatment, they can still result in substantial tax liability—particularly when gains are triggered by the sale of private investments, carried interest distributions, or legacy stock positions.

In these scenarios, a tax-aware long/short strategy acts as a flexible loss engine. Losses generated within the portfolio can be applied against gains from passive investments, private equity distributions, or fund carry. Because the manager controls the realization schedule, the strategy can be tailored to match the timing and character of the gains the investor is facing in a given year.

Real estate sales, especially after years of depreciation and appreciation, often lead to gains that are difficult to defer or shelter. When 1031 exchanges are not available or not aligned with the client’s goals, a tax-aware strategy can provide an alternative method to offset those gains.

The benefit of a market-based tax-aware strategy such as long/short is its liquidity and precision. Unlike real estate, which is illiquid, securities portfolios can be adjusted dynamically to realize losses at the right time and in the right amount. Tax-aware long/short can be a tool to manage tax consequences for real estate investors looking to rebalance their portfolios or exit appreciated assets.

Selling a private business typically results in a once-in-a-lifetime liquidity event and preceding a large capital gain. While estate planning and charitable strategies can help reduce the tax burden, they often require years of lead time.

A long/short tax-aware portfolio, can be deployed within a shorter planning window and can assist legacy plans through capital management. By positioning the strategy in advance of the transaction, investors can begin building a loss reserve to apply against the gain in the year of sale. Because losses can be harvested in a targeted and controlled way, the approach complements broader pre-sale planning efforts and enhances overall after-tax outcomes.

Implementing a tax-aware strategy is not a one-size-fits-all solution. It is a complex investment strategy that requires coordination with the investor’s broader financial plan and must be tailored to the nature of the gains being offset.

It’s critical to manage wash sale rules, track holding periods, and avoid undermining long-term portfolio objectives in pursuit of short-term tax benefits. This type of strategy can be best implemented by a manager with experience navigating the nuances of both investment markets and tax code.

A long/short tax-aware strategy is an investment technique that can be used as a powerful tax planning tool. When used intentionally, it can reduce the impact of capital gains, smooth taxable income across years, and support long-term wealth preservation.

For high-net-worth families navigating complex income events or planning significant asset sales, this strategy can be a sophisticated and flexible way to manage tax exposure without compromising overall portfolio strategies.