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Canvas (by Franklin Templeton) is hosting a welcome reception the evening before Basis Northwest 2026 at Aerlume Seattle.

Please RSVP so we know how much room we need.

Register for the Opening Night Gathering

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Following the conference, we’re going to the Mariners game against the Diamondbacks. You need a ticket to get in.

RSVP for the Mariners game

Here’s the preliminary Basis Northwest 2026 agenda.

I will post a current version once per week as inevitable changes occur.

If you’re curious… attendee stats…

We have a few seats left…

Register for Basis Northwest

Happy Tues.

Discounts for advisers, just reply to this email.

🍴🍴🍴

Canvas (by Franklin Templeton) is hosting a welcome reception the evening before Basis Northwest 2026 at Aerlume Seattle.

Please RSVP so we know how much room we need.

RSVP for the welcome reception

🔱🔱🔱

Following the conference, we’re going to the Mariners game against the Diamondbacks. You need a ticket to get in.

RSVP for the Mariners game

A friend pinged me early Wednesday last week, saying that he’d noticed an Avis short position was creating a lot of damage in a tax-aware long/short portfolio.

Tax-aware long/short strategies have dominated the discussion in tax management for the last year or so. Assets are well above $100 billion now, and it seems like everyone is adding it to their practice (or at least trying).

Getting up to speed on tax-aware long/short? Start here.

Since Fidelity announced in December that it would pause new long/short account openings and later extended the pause, and after that said it would dramatically increase financing rates for many intermediaries on its platform, only to be followed by Schwab late last week announcing a different flavor of restrictions (but restrictions, nonetheless), advisers are learning how difficult it is for custodian/brokers to prudently scale these strategies.

Bloomberg quoted me on the matter…

Amidst all that, my dad called me.

My dad doesn’t care about the private wealth industry or most of what I write about. He follows the markets for entertainment and for some light day trading.

He knew all about the Avis situation from Fox Business News. This was a big story, he assured me.

There are some interesting implications for long/short strategies, but first, how did we get here? How can we enhance manager diligence? And does it even matter long-term?

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The preliminary agenda should be available on Friday.

Late yesterday, three advisers reached out with news about access to long/short strategies at Schwab.

Getting up to speed on tax-aware long/short? Start here.

Also developing…

The well-reported Avis short squeeze is apparently having an impact on tax-aware long/short investors, according to several sources with first and second-hand access to performance reports.

There’s only room in this post for one story, but the mechanics of that situation are interesting and will surely influence the risk management process at all managers going forward.

Many observers are drawing analogies to the VW 2008 short squeeze.

As a quick aside, the tax benefits in long/short strategies come from risk-taking (unlimited risk in the case of the shorts), which has practical implications some are painfully experiencing now, but also for economic substance analysis, which I'll hopefully explore soon.

Schwab adjusting access to long/short is interesting because I just wrote a little summary of Schwab CFO’s comments in the 1Q 2026 earnings call about how long/short is “not a balance sheet capital-intensive type of activity” and also, interestingly, a driver of margin growth (typically a good thing).

And before that, about how Schwab’s CEO appeared so accommodating to folks departing Fidelity, given Fidelity's new long/short account opening pause and subsequent targeted financing rate increase, saying “we’ve got a big balance sheet” at Future Proof Miami earlier this year.

He actually went quite a bit further, saying…

I think, you know, we benefit from the fact that we’ve got a big balance sheet.

We’re a public company. We can access markets. And so we can support the balance sheet growth that supports the leverage behind the strategy.

So we are supportive of it. And you can see why it makes a ton of sense and why I think it’s going to continue to grow.

We have, I’ll speak to our retail business for a moment. We have 70% of our retail clients that have a large concentrated position. And I’m sure a lot of your clients have benefited from single stocks that have gone well above where they expected. So they’re sitting on these enormous gains. This portfolio makes a ton of sense.

We’re going to support it. And I just want everyone in this audience to know that’s an RIA, bring your new assets to us. We’d love to support you.

The Compound and Friends - A Sit-Down with Rick Wurster, CEO of Charles Schwab (Episode Date: March 13, 2026)

However, based on adviser accounts shared with me yesterday, today Schwab will apparently announce the following changes:

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Discounts for advisers, just reply to this email.

The agenda should be available on Thursday.

I have a script that scans EDGAR filings weekly for the latest ETFs seeding in-kind.

The list has more than a dozen tickers.

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The agenda should be available by mid-next week.

Tax-aware long/short is all over Schwab’s 1Q26 results.

Getting up to speed on tax-aware long/short? Start here.

Before jumping in… plenty of folks have asked me about Elm’s write up on tax-aware long/short, which Matt Levine picked up.

I think Haghani and White are directionally correct on the importance of cost and complexity, but I’m not a fan of drawing precise results (e.g., “an average after-tax return of 2.16% pa” and “LSDI program’s expected return is 0.11% pa lower,” etc.) using an imprecise model like geometric brownian motion (GBM).

For reference, Rama Cont’s 2000 paper lists 11 “statistical properties of asset returns” (things like fat tails, vol clustering, gain/loss asymmetry, etc.) that GBM doesn't capture. Elm’s results are a function of a vastly oversimplified model (constant drift, vol, and correlation, log-normality, etc.) and its inputs, which don’t reflect reality the way a sampling and rolling-window approach with confidence intervals would.

AQR’s paper from March covers the interplay of fees and alpha rigorously. Even if I disagree with Haghani and White’s methods and assumptions, I think they’re right to scrutinize cost and complexity.

Just a month ago, Schwab’s CEO told us that they welcome advisers departing Fidelity due to rising financing rates and that they have a “big balance sheet” to support new long/short activity.

Then, on the 1Q Schwab earnings call last week, Schwab said that long/short is “not a balance sheet capital-intensive type of activity.”

The latter seems more correct.

Schwab’s numbers are interesting (“$21.3 billion related to long/short strategies implemented by RIA clients”), but I think investors and advisers are wondering whether Fidelity is raising rates for business reasons, to mitigate risk, or for some other reason entirely.

If long/short isn’t balance sheet intensive, what could be driving Fidelity to increase financing for some of its intermediary clients?

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The agenda should be available by mid-next week.

I’ve owned 3 pairs of Allbirds. Two pairs fell apart. One pair of green loafers is going strong. I wear them approximately twice a year.

So, you can imagine my (and everyone’s) surprise when Allbirds belly flopped, then abruptly pivoted to… AI infrastructure.

Everyone pounced… but one company (below) pulled off a pretty amazing pivot decades ago, and maybe Allbirds will too?

Who knows… maybe they’ll prove everyone wrong?

Nintendo has a famous pivot story.

Latest coverage

Recently updated paper on SSRN.

TGIF.

Discounts available for wealth managers. Just reply to this message.

Educational content. Not tax advice. Work with a tax professional.

When an investor holds a regulated futures contract directly, or another Section 1256 contract, the gains are split 60% long-term / 40% short-term no matter the holding period. Both pieces are capital gains on Schedule D and are fully offsettable by tax losses harvested elsewhere.

But… when a mutual fund or ETF holds those same regulated futures and distributes the gains, the 40% short-term piece becomes ordinary:

• Ordinary rates (most people know this)

• Ordinary character (most people do not know this)

People love to argue with me about this, so let’s start with this from IRS.

A net short-term capital gain loses its separate character as a short-term capital gain upon inclusion in investment company taxable income… Short-term capital gains become ordinary income when short-term capital gains exceed short-term capital losses for the taxable year..

IRS Field Attorney Advice 20164001F (July 12, 2016)

This applies to any short-term capital gain distributed by a mutual fund or ETF, but the 60/40 nuance in regulated futures is front of mind, so I figured I'd explore it further.

Ordinary character matters because external tax-loss harvesting won’t help that much with the tax bill if a regulated investment company (RIC) shovels out short-term capital gains (but Internal losses, the kind a fund’s portfolio managers do, within the fund, will help).

In other words, losses from a robo-advisor, direct indexing, tax-aware long/short, etc., cannot meaningfully offset short-term capital gains distributions by a RIC, including from managed futures and derivative income ETFs and other sources of short-term capital gains.

Since the short-term gains are technically ordinary, harvested losses may offset $3,000 per Section 1211(b), as a tiny silver lining.

Below, I provide a numerical explanation via an infographic for how this plays out.

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I met Shang Chou in the fall of 2023. Tax Alpha Insider was 1 month old, and he sent me a message out of the blue.

We actually overlapped at PIMCO 15 years ago, though we didn’t meet then.

Now he’s running Dishmi Capital out of Pasadena, CA (near my hometown), and it’s my pleasure to announce that he is co-hosting Basis Northwest, May 28-29, 2026, in Seattle, WA.

In 2023, I was mostly writing about direct indexing and a tiny bit about tax-aware long/short…

But I was gradually branching out into other asset classes, and Shang’s co-authored article on the potential tax efficiency of futures-based bond funds caught my eye.

Shang is one of many friends serving families through rigorous tax-aware analysis and planning, and I’m glad to have him involved with Basis Northwest.

See you in Seattle.

Happy Tues.

Discounts available for wealth managers. Just reply to this message.

This article is educational material. It analyzes whether and how borrow fees on short positions may be deductible. This is an analytical exercise, and not personalized guidance. Readers should consult a licensed tax professional knowledgeable about current developments in tax law, who is comfortable rendering an opinion on this matter and preparing their tax return accordingly.

If your clients hold long/short equity strategies in separately managed accounts, they pay borrow fees, the daily cost of borrowing shares sold short.

Borrow fees are obscure, but Interactive Brokers does a magnificent, industry-leading, I’m-very-impressed job of explaining them.

To make borrow fees less obscure, I went way overboard and built a dashboard, pulling the current rates from Interactive Brokers (thousands of names) daily at a new little app I’m calling Borrow Quest.

Check out Borrow Quest

Are borrow fees, which could be 25-50 (or more) basis points per large cap position, deductible, or were they eliminated with other miscellaneous deductions, like investment advisory fees, when the Tax Cuts and Jobs Act passed in 2017, or is it something else entirely?

Conservatively, there’s something like $100 billion in net tax-aware long/short assets in separately managed accounts today. If we assume 150/50 is the average gross exposure, then that means $50 billion is in short positions. If it costs 30 basis points in borrow fees annually to hold these short positions, then we’re talking about $150 million in costs that are, or are not, deductible in some shape or form. Further assuming a marginal tax rate of 30%, that's $45 million, or very roughly 4-5 basis points per net dollar invested in the long/short strategy overall ($400-$500 per $1 million). Obviously, approximately.

Yawn?

In my mind, this is worth chasing down, or perhaps going through the exercise of chasing it down, but as you’ll soon see, it’s not so straightforward.

Are borrow fees deductible?

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The April 15th tax return deadline is approaching. Any nasty surprises this year?

Hit reply and give me a sentence or two, and I’ll aggregate into a tiny (hopefully hilarious, certainly anonymous) post-mortem.

Many investors and advisers are reckoning with tax-aware long/short gains, losses, margin, short rebate, dividends, payment in lieu, and borrow fees for the first time. How’s it going?

If you’re getting up to speed on tax-aware long/short, here is a brief introduction.

Bloomberg

I was on Bloomberg talking about seeding ETFs in-kind via Section 351.

Here’s my 351 tracker: https://www.351.tax.

Here’s my deep dive paper w/ : Managing Concentrated Public Stock Positions by Seeding an Exchange-Traded Fund

It took my trader buddies about 10 seconds to start texting me after the segment ended, but I’m pleased to say it took days for any wealth management buddies to notice.

As it should be! Wealth is slow and deliberate. Plan and chill.

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TGIF

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I recently became obsessed with enhancing portfolio resilience (risk, inflation, tax), and part of that is hunting for portfolio diversifiers… and understanding how those diversifiers are taxed.

I read an old/2010 AQR paper suggesting that managed futures might do the trick. And here’s an AQR blog post from yesterday making a similar point.

I also interviewed Andrew Beer at Future Proof Citywide (Miami) and might be smitten.

Before getting into managed futures, I wanted to understand how plain ‘ole futures are taxed.

Like many things in tax management, taxation of futures contracts is relatively straightforward after staring at it for 4 hours.

I’ve distilled all that work into the infographic below.

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I’m super excited to have Alex Morris of F/m Investments speaking at Basis Northwest.

F/m came onto my radar when I learned that they registered a mutual fund share class on one of their ETFs sometime in early 2025.

That got a bunch of double-takes.

Then they actually got it done.

The broad narrative was that mutual funds were dying. Full stop. But plenty of investors and advisers appreciate mutual funds for a variety of reasons.

The bigger trend that F/m and others are driving is the “wrapper agnostic” movement, where investors choose the investments first and the wrapper second.

That’s one of about a thousand things Alex could share at Basis Northwest 2026.

See you in Seattle.

Happy Tues.

Discounts available for wealth managers. Just reply to this message.

The Tax-Aware Long/Short Practitioner Group will meet on Day Two (May 29, 2026).

Berkin and Luck’s 2009 paper, Having Your Cake and Eating It Too: The Before and After Tax Efficiencies of an Extended Equity Mandate, was the first paper about tax-aware long/short I read.

If you’re getting up to speed on tax-aware long/short, here is a brief introduction.

This article is about how the dividends that strategies like 130/30, 250/150, etc. collect on long positions and pay on short positions are taxed at the federal and state levels, including a few infographics and some weirdness investors might need to keep in mind when transferring assets between custodians.

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Basis Northwest registration is open.

25 seats remaining.

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The Tax-Aware Long/Short Practitioner Group will meet on Day Two (May 29, 2026).

⚾️ 🔱 post-conf (evening of May 29, 2026) Mariners game? Fill out this form

Let’s get back to basics.

If anyone needs a reminder, the whole Chamath you’re welcome for the capital losses “rage bait” thing revealed what people actually care about... pretax investment performance, risk management, etc.

By all means, harvest losses and take advantage of tax-optionality and planning, but don’t let tax distract from the whole reason for investing in the first place.

This is an important reminder as the tax-aware long/short space becomes increasingly crowded (see market map below).

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Basis Northwest registration is open.

29 seats remaining.

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The Tax-Aware Long/Short Practitioner Group will meet on Day Two (May 29, 2026).

⚾️ 🔱 post-conf (evening of May 29, 2026) Mariners game? Fill out this form

I love the mechanics of tax alpha, but it should not drive investment decisions.

This is happening more and more as asset managers create increasingly tantalizing tax-aware products and wealth managers win new clients based on tax prowess.

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Basis Northwest registration is open.

~30 seats remaining.

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The Tax-Aware Long/Short Practitioner Group will meet on Day two (May 29, 2026).

⚾️ 🔱 post-conf (evening of May 29, 2026) Mariners game? Fill out this form

351.tax is a little spicier now (hot pink is back, right?), and includes many more ETFs than I originally thought. Many were launched in March 2026.

Check out 351.tax

It’s funny. When I wrote Will seeding ETFs in-kind go mainstream? in December of 2024, things were just heating up.

Now, seeding ETFs in-kind seems like a mainstream inevitability.

There’s growth in launch assets (the chart above), and there are two other interesting indicators…

But first, some friendly visuals to get everyone up to speed.

A diversified portfolio (there’s a technical definition) may seed an ETF at launch via Section 351 of the Internal Revenue Code.

This isn’t an exchange fund.

If the seed portfolio is not diversified at the individual level, then those individuals are denied Section 351(a) nonrecognition. That means the transfer is taxed like a sale.

That’s the background… why do I think seeding ETFs is going mainstream?

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Basis Northwest registration is open.

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The Tax-Aware Long/Short Practitioner Group will meet on Day two (May 29, 2026).

Speaking of the Tax-Aware Long/Short Practitioner Group…

The first task I would like to work on as a group is to establish best practices for transferring a full long/short SMA from one custodian to another.

Considerations:

• Full ACAT transfer without closing any position is apparently possible

• Sending and receiving custodian specifics

• Financing:

  • Rates depend on custodian/broker

  • Who negotiates rates depends on custodian/broker

  • Rates might also depend on leverage

• Cost basis:

  • What should advisers know before they go?

  • Is it accurate and available in a timely manner?

• Account balance: Does this matter?

• How long does the process take end-to-end?

• How long will the account be unable to trade while in transition?

What else would you like to know?

Share anything/everything, and I’ll aggregate into best practices and benchmarks (especially financing rates).

Everything is off the record.

Reply to this email.

Early yesterday, adviser friends began pinging me on Twitter, saying Fidelity would substantially increase financing costs for some long/short SMAs.

If you’re new to tax-aware long/short (e.g., 130/30, 250/150, etc.), apologies in advance, this post is 1,000 miles down a rabbit hole, but here’s a refresher for anyone getting up to speed.

Every platform is different, but “financing” is the margin rate (call it 6%) less the short rebate, the rate earned on cash proceeds from short sales (call it 5%) for a “through the middle” cost of 1%, “per turn of leverage.” (hypothetical)

For example, a 130/30 strategy at 1% through the middle has actual financing costs of 30% * 1% = 30 basis points.

There may be brokerage or transaction costs, and there are also borrow fees for individual names, but set those aside for now.

Yesterday, Fidelity informed some advisers that their financing costs would increase to 152 basis points or higher, according to several advisers I spoke with off the record.

So, for a 130/30 strategy, 30 bps financing might become 45.6 bps.

An adviser suggested that at least one long/short manager might lower their fees to help offset higher financing costs.

Another adviser simply called Fidelity’s announced increase, taking effect May 1, 2026, a “rug pull,” but a more nuanced picture of the situation emerged through a dozen or so conversations yesterday.

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Scroll past the 351.tax announcement for more logistics/FAQs.

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Quellos CEO Jeffrey Greenstein and tax attorney Charles Wilk created a product called POINT that fabricated $9.6 billion in transactions for five wealthy clients, generating capital losses that deferred roughly $240 million in federal taxes.

POINT was a sham.

For three weeks, I’ve been writing about the Quellos tax shelter case.

This is the final episode of Safe Harbor. If you have information about Quellos or would like to tell your side of the story, I would be glad to hear from you.

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⚾️ 🔱 Post-conf (evening of May 29, 2026) Mariners game? Fill out this form

FYI: The Tax-Aware Long/Short Working Group will meet on Day 2 of Basis Northwest.

We’re going til at least 4 PM PT on both days. Buckle up!

At Future Proof Citywide last week, the Compound and Friends guys asked Schwab’s CEO about tax-aware long/short.

Tax-aware long/short strategies (e.g., 130/30, 250/150, etc.) are white-hot in taxable wealth nowadays. Here’s a refresher for anyone getting up to speed.

In December, Fidelity announced it would pause new tax-aware long/short account openings, then in February indefinitely extended the pause. Here’s my reporting.

Many people are speculating about why Fidelity paused, but that's a topic for another post.

Fidelity-only advisers have been scrambling to onboard at other custodians, namely Schwab, but also Pershing and to a lesser extent Goldman Sachs, who are filling the vacuum Fidelity left.

Schwab and Pershing have recently started lowering their financing spreads (margin minus short rebate), which was one of Fidelity’s competitive advantages, to win tax-aware long/short business.

Here’s the conversation w/ Schwab’s CEO:

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