TRUEHAVEN CAPITAL
Tax-Aware Long/Short
A smarter way to harvest portfolio losses
When loss harvesting runs dry
A portfolio that has performed well brings its own set of challenges. Large capital gains embedded in many of the positions and few losses left to loss harvest. Rebalancing efforts would result in gain realization, leaving the investor with hard decisions on either side. Do I rebalance and eat the tax or stay in concentrated positions?
A tax-aware long/short strategy keeps a portfolio invested in the market while adding a layer of long and short positions designed to create loss-harvesting opportunities a long-only portfolio may no longer offer.
Three simple steps
Your portfolio stays in place
Existing holdings or cash in a taxable account form the core. Appreciated positions do not have to be sold to begin.
Long and short positions are added
Using the core as collateral, a manager buys additional stocks and sells others short in offsetting amounts, so overall market exposure stays about the same.
Losses are harvested as markets move
Some positions on either side will lose value. Those losses can be realized and may be used against gains elsewhere.
How does this look in practice?
See what a structure like this could mean for a year-one tax bill, using stated assumptions.
Before you continue. What follows is a hypothetical illustration built on assumptions, not tax advice and not a projection of what you would experience. TrueHaven expresses no view on any tax matter; your own tax counsel determines your tax results. Do you understand?
Modeled losses harvested in year one: .
See the details
Hypothetical and for illustration only. Loss figures use the third-party manager’s modeled estimates: net short-term losses of of capital in year one at this structure (36.7% per 100% of short extension, scaled in proportion). The highest deferral is typically in year one, and it tapers off by year five. Target tracking risk at this structure: . The tax columns assume an investor who realizes capital gains this year equal to the capital shown (), taxed at 23.8% federal (20% plus the 3.8% net investment income tax) with no state income tax. Modeled estimates are not guarantees; actual losses depend on markets and may be far lower or zero. Does not reflect fees, financing costs, or investment gains and losses. Deferred tax is generally owed later. Not tax advice.
What a tax-aware long/short strategy may help with
Rejuvenate an ossified portfolio
Long and short positions can each produce losses in different markets, which may create opportunities after a long-only portfolio has used up its loss opportunities.
Prepare for a known gain
When a sale or liquidity event is on the horizon, losses realized ahead of it may help offset part of the gain.
Diversify a portfolio
Realized losses may be paired with gradual sales of a concentrated or legacy position, reducing it over time and paving the way for a more diversified portfolio.
These are potential outcomes, not assurances. Tax benefits vary and are not guaranteed.
Situations we are asked about
- The situation
- A business sale, real estate sale, or other large gain is expected in the next few years.
- How it may be used
- The strategy is put in place ahead of time so that realized losses can accumulate before the gain arrives.
- What to weigh
- Lead time matters. The less time before the event, the less there may be to work with, and losses realized afterward are a different conversation.
- The situation
- One low-basis stock makes up a large share of a portfolio, and selling it outright is too costly.
- How it may be used
- The stock serves as collateral for the long and short positions. As losses are realized, portions of the stock may be sold against them and the position wound down gradually.
- What to weigh
- The concentration risk remains while the position is being reduced, and the pace of winding down the position depends on the markets.
- The situation
- A long-held portfolio or direct-indexing account has appreciated to the point that there is little left to harvest and rebalancing is expensive.
- How it may be used
- Long and short positions are added around the existing holdings, which may restore the ability to realize losses and adjust the portfolio.
- What to weigh
- This adds leverage, cost, and complexity to a portfolio that was simple.
- The situation
- Compensation arrives as company stock year after year, building both a concentrated position and recurring taxable events.
- How it may be used
- Realized losses may help offset gains as shares are sold on a plan, alongside whatever trading restrictions apply to you.
- What to weigh
- Company trading windows, pledging rules, and holding requirements may limit what can be used as collateral or sold.
General descriptions, not recommendations. Whether and how realized losses can be used depends on your individual tax circumstances, which your tax counsel must evaluate.
Why a long-only portfolio ossifies
In a long-only portfolio, a loss can be harvested only from a position that falls below its purchase price. As markets rise and each harvest resets cost basis lower, fewer positions qualify. Over time the portfolio locks up: little left to harvest, and gains everywhere you might want to trim.
Conceptual illustration only. The lines are drawn to show a general pattern, are not based on actual or projected results of any strategy, and are not to scale. A long/short strategy is designed to keep producing loss-harvesting opportunities; results vary and are not guaranteed.
Long-only direct indexing
Simple, lower cost, no borrowing or shorting. The tax benefit tends to fade as the portfolio appreciates, unless new cash is added.
Tax-aware long/short
Losses can come from both long and short positions in more market environments, in exchange for leverage, higher cost, and a more involved exit.
Worth exploring if…
A tax-aware long/short strategy is generally not designed for retirement accounts, money you expect to need soon, or investors who are not comfortable with leverage.
Think tax-aware long/short might be a fit for you?
Book a 30-minute conversationWhere TrueHaven fits.
A tax-aware long/short strategy inside an advisory relationship
What we do
In connection with this service we:
- Assess and advise you on whether the strategy belongs in your plan
- Evaluate and select the strategy and its manager
- Coordinate account setup, funding, and the transition of existing positions
- Monitor the strategy on a continuous basis alongside the rest of your portfolio
Who manages the strategy
The strategy itself is managed by an unaffiliated third-party manager in a separately managed account held in your name.
What it costs
Charged either as part of a family office relationship or as an AUM fee based on the assets assisted with TALS. Third-party manager fees and financing costs are not included.
What we do not do
TrueHaven does not provide tax or legal advice. All tax conclusions are your tax counsel’s.
Working alongside your tax counsel.
How we coordinate
The value of a realized loss depends on the rest of your tax picture: the gains you expect, when you expect them, and what you already carry forward. We coordinate with your CPA or tax counsel so the strategy is sized and timed around what they see.
What we do not do
TrueHaven does not provide tax or legal advice. All tax conclusions are your tax counsel’s.
What it costs
AUM fee based on the assets assisted with TALS. Third-party manager fees and financing costs are not included.
Related: Section 351 ETF Exchange, a means to diversify out of concentrated, low-basis positions.
TrueHaven Capital, LLC does not provide tax or legal advice. The tax consequences of any strategy must be evaluated by the client’s own tax counsel, on whose opinion the client relies. TrueHaven expresses no view on any tax matter. The illustrations on this page are hypothetical, are based solely on figures entered by the reader, and are not a prediction or assurance of any result. Tax-aware long/short strategies use leverage and short selling and are not suitable for all investors. Nothing on this page is an offer to sell or a solicitation of an offer to buy any security, and nothing on this page is a recommendation to any person. All investing involves risk, including the possible loss of principal. Form ADV Part 2A available on request. See our Disclosures page for additional information.