Tax Strategies for the Rich Are Going Mainstream. But Do They Work for Everyone?

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We’ve written before about how stock trading and alternative assets have gone mainstream. Now, so too have the tax strategies once largely reserved for hedge funds and ultrawealthy families.

According to Charlie Wells, Denitsa Tsekova, and Isabelle Lee from Bloomberg:

• Enthusiasm for tax-aware strategies is incredibly high, fueled by a mix of factors. Technology has made tools like algorithmic tax-loss harvesting more accessible to everyday investors. Meanwhile, social media influencers are actively promoting these strategies and the goal of “tax alpha” (generating investment losses that can offset gains and reduce your current tax bill).
• But the more sophisticated strategies, which can involve short selling, borrowing, frequent trading, and active management, add costs and risks that make them a poor fit for smaller portfolios. For everyday investors, simpler options like IRAs and 401(k)s may offer more value in the end.
• The industry is also showing signs of caution. Fidelity has stopped opening new long-short accounts, while Charles Schwab introduced new leverage caps and account minimums. The US Treasury is also scrutinizing several tax-aware tactics for potential abuse.

Our take? Greater access to sophisticated investment strategies can be a good thing. But democratizing access doesn’t necessarily democratize the benefits. A strategy designed around the tax problems of the ultrawealthy may make far less sense for an everyday investor, once you factor in fees, leverage, complexity, and eventual tax liabilities. And, as far as following the advice of influencers? Treat anything you hear from one as something you might overhear a complete stranger say; it may be worth considering, but seek expert advice because it may also be worthless or worse than worthless (just ask a physician of a certain age). We’ve written before about why you should take finfluencers with a grain of salt, in our article “Young Investors Are Investing.“ Are They Getting It Right?