Long/Short Tax Loss Harvesting: A Guide for Financial Advisors

Table of Contents:

Executive Summary

  • Long/Short TLH expands traditional tax loss harvesting using leveraged long/short positions
  • Key Benefit: 1-3% additional annual tax alpha, 3-5x more harvesting opportunities
  • Target: High-net-worth clients with $500K+ taxable accounts

I. The Concept

A. Traditional TLH Limitations

  • Long positions only, seasonal timing, limited opportunities (1-3% of positions)

B. Long/Short Enhancement

  • Harvest losses from both long AND short positions while maintaining market exposure
  • Strategies: 130/30, 150/50, 200/100 (long/short allocations)

II. Key Benefits

A. Enhanced Tax Alpha

  • Historical Results: +1.4% to +2.8% annual tax alpha by strategy
  • Market Independence: Effective in bull, bear, and volatile markets
  • Frequency: Year-round harvesting vs. seasonal traditional approach

B. Portfolio Advantages

  • Maintain investment strategy without style drift
  • Superior wash sale management using opposite positions
  • Continuous rebalancing capabilities

III. Risks and Costs

A. Key Risks

  • Leverage risks and margin calls
  • Short selling risks (unlimited loss potential)
  • Operational complexity

B. Cost Structure

  • All-in costs: 0.65% to 1.88% annually depending on strategy and custodian 
  • Net Benefit: 0.75% to 1.10% annual tax alpha after all costs
  • Break-even: 6-18 months depending on account size

IV. Client Suitability

A. Ideal Candidates

  • High-net-worth individuals in top tax brackets
  • $1M+ taxable assets for optimal economics
  • Sophisticated investors comfortable with leverage
  • Long-term investment horizon

B. Poor Fit

  • Conservative investors, smaller accounts, short-term horizons

V. Implementation Requirements

A. Technology Needs

  • Automated platform with wash sale monitoring
  • Margin accounts with short selling capability
  • Real-time risk management

B. Compliance Framework

  • Enhanced suitability documentation
  • Risk disclosures and supervision requirements

VI. Economics and Break-Even

A. Cost-Benefit Analysis

  • ROI: 1.5x to 2.2x return on implementation costs
  • Account Minimums: $500K break-even, $1M+ optimal
  • Time to Break-Even: 8-14 months for $1M+ accounts

Conclusion

Key Takeaways

  • L/S TLH delivers measurable, backtested tax benefits for suitable clients
  • Requires proper technology, processes, and client selection
  • Significant competitive advantage and client value creation opportunity

Implementation Steps

  1. Assess client suitability using $1M+ and sophistication criteria
  2. Select technology platform with automated capabilities
  3. Develop compliance and risk management processes
  4. Launch pilot program with performance tracking

Appendices

  • Client Suitability Checklist
  • Technology Platform Requirements
  • Backtesting Methodology Summary
  • Implementation Timeline Template

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