Financial advisors and clients seeking to boost the tax savings available through loss harvesting may consider an increasingly popular leveraging strategy known as the “long-short” method.

The combination of “long” investments on a stock’s positive outlook with “short” ones based on equity declines, plus margin loans that add debt leverage to the vehicle, may turn off some advisors with risk-averse clients who don’t have a lot of capital gains that need offsetting. But tax-aware long-short investing is drawing clients seeking to maximize returns through active management on a lengthy timeline with lower payments to Uncle Sam.

At their root, tax-aware long-short vehicles present “an opportunity to go overweight certain factors and go underweight certain factors and find alpha between the two,” said Brent Sullivan, a consultant on taxable investing product distribution to sub-advisory and ETF firms who writes the Tax Alpha Insider blog. The accompanying tax savings stem from loss harvesting that “oftentimes will exceed a dollar contributed” or could even reach 200% to 400% of the principal, he noted. Continual rebalancing pushes up the losses past the level available from many direct indexing strategies in a process Sullivan compares to a “perpetual ball machine.”

“The loss harvesting paradigm here is just totally different than a direct indexing long-only,” Sullivan said. “As the market goes up, you can continue shorting. Those shorts generate harvestable losses.”

READ MORE: How the ticking clock affects tax-loss harvesting

A ‘rapidly growing but sometimes confusing area’

Much like his research documenting the continual rise in Section 351 conversions to ETFs, Sullivan is keeping close watch on tax-aware long-short vehicles, which have already surpassed his prediction of attracting $30 billion in assets under management by the end of the year. AQR Capital Management, a pioneer in tax-aware long-short strategies, is leading the way with $21.7 billion, but other managers such as Invesco, BlackRock and Quantinno have pushed the total above at least $35 billion, Sullivan noted in a newsletter last month.

“Today, advisers recognize that tax is a practice differentiator and a source of recurring client value,” Sullivan wrote. “They may be torn between low-cost, passive index ETFs and direct indexing, but that debate fades into the background once they learn of tax-aware long/short strategies.”

On the other hand, AQR itself is seeking to “help parse the jargon of this rapidly growing but sometimes confusing area” amid some “blurring of terminology, strategy design and investment objectives,” the asset management firm said in a blog post earlier this year. The company pushed back on the idea that the strategies are “only for billionaires” or simply trying to achieve benchmark returns, along with the notion that they are a form of “supercharged direct indexing.” While their tax benefits “are larger and last longer” than those of direct indexing, the two strategies come from “diametrically opposite starting points (active management for the former versus passive indexing for the latter),” the post said.

“Tax-aware long-short factor strategies realize higher tax benefits than direct indexing not because they try harder, but because they (1) trade quite a bit due to changes in pretax alpha, (2) hold large positions relative to invested capital due to leverage, and (3) can slow unnecessary gain recognition without significantly impacting pretax alpha, thanks to relatively long holding periods and highly diversified portfolios,” the company wrote. “The core strength of tax-aware long-short strategies lies in their ability to align pretax performance with the needs of tax-sensitive investors.”

READ MORE: A complex but tax-friendly approach to diversification

Estate implications

Those characteristics may eventually pose tax problems with a client’s estate plans, Sulllivan noted. Estates face an obligation to settle any debts.

“The strategy is effectively over,” he told FP. “You will realize a ton of capital gains if you suddenly, without planning, close the long and short positions.”

Advisors and their clients could take steps to wind down the leverage “years and years in advance” with as low tax exposure as possible, he said. Or they could set up an intentionally defective grantor trust or another entity instructing the trustee to manage the strategy based on a “prudent investor standard” and a long-term plan for the estate and its heirs, Sullivan said.

Since “you do not want to be auto-liquididated” upon the benefactor’s death, some of the “the brightest minds out there are thinking about trust structures” to hold the tax-aware long-short strategies, he said.

“That can be a real tax drag for any assets passing to beneficiaries,” Sullivan said. “What you do is, make sure that the trust is properly structured to continue holding margin and short positions. You’re essentially transferring the entire balance sheet of the strategy.”

President Donald Trump’s Hollywood ambassadors joined studios, labor unions and producers in asking the White House to expand and extend tax incentives as part of an upcoming budget reconciliation bill.

A letter dated Monday asked the president to include three film and TV incentives in the budget bill being drafted by Congress. The coalition includes the Motion Picture Association, which represents Hollywood studios, as well as unions of writers, actors and other trades.

Actor Jon Voight, who was named one of three special ambassadors to Hollywood in January, is leading the effort to obtain assistance from Washington to boost US film and TV jobs. The groups signing the letter represent nearly 400,000 industry professionals. Sylvester Stallone, another Trump ambassador, also signed the letter.

The U.S. film and TV industry has struggled in recent years as entertainment companies reduced their spending and moved production overseas, where cheaper labor and more generous government subsidies make their business more profitable. 

The letter doesn’t mention tariffs on foreign film production, which Trump said he would pursue in a social media post on May 4. His 100% tariff proposal, made after a visit with Voight, sent the shares of studios such as Netflix Inc. and Walt Disney Co. tumbling as investors considered the possibility of rising costs and a trade war in the entertainment business. 

The specific proposals in the new letter involve reviving Section 199 of the tax code, which provided deductions for manufacturing to film and TV production, extending Section 181, which allows for accelerated deductions, and restoring Section 461, which lets businesses use past losses to reduce future taxes.

A powerful House committee has tucked language preventing states from regulating artificial intelligence into President Donald Trump’s massive tax and spending bill, a move that would benefit many of the U.S.’s largest tech and AI companies. 

OpenAI, Meta Platforms Inc., and Alphabet Inc.’s Google are among the firms that have argued that state AI regulations would hamstring the burgeoning technology. Meta in April comments to the White House also said state-level rules would raise compliance costs for AI companies. 

The House Energy and Commerce Committee’s draft bill, which the panel will debate on Tuesday, would place a 10-year moratorium on “any law or regulation regulating artificial intelligence models, artificial intelligence systems, or automated decision systems,” according to language released late Sunday. 

It’s unlikely the language will meet the strict bar for ultimate inclusion in the tax bill, which is being pushed through Congress with only Republican support using a special parliamentary procedure. Senate rules require that provisions passed using the procedure be primarily fiscal in nature.

But its inclusion signals where key Republicans stand on the matter just one month after tech executives urged Congress to pass federal AI legislation to prevent states from creating their own rules. 

AI safety advocates and critics of big tech on Monday warned that the language, if passed, would hamstring state governments seeking to ensure the technology is deployed safely and ethically.  

Brad Carson, president of the AI safety think tank Americans for Responsible Innovation, called the language a “giveaway to Big Tech that will come back to bite us.”

“Tying the hands of lawmakers when it comes to taking on big tech could have catastrophic consequences for the public, for small businesses, and for young people online,” Carson said. 

Patchwork solution

This year alone, at least 45 states and Puerto Rico introduced at least 550 AI bills, according to the National Conference of State Legislatures. And that number is only set to grow in the months ahead. 

California lawmakers’ push last year to pass AI safety laws was opposed by tech companies and venture capital firms, such as OpenAI and Andreessen Horowitz, and ultimately vetoed by California Governor Gavin Newsom, a Democrat. State lawmakers are trying again this year to pass a pared-back bill aimed at holding AI developers accountable for any severe harm caused by their products. 

During an April Energy and Commerce hearing, Scale AI Inc. CEO Alexandr Wang called for “one federal standard” on AI. 

“We cannot afford a patchwork of 50 different state standards that we have to execute against,” Wang said. 

Representative Jay Obernolte, a California Republican on the panel, agreed with Wang, saying Congress has a “limited amount of legislative runway to be able to get that problem solved before the states get too far ahead.” 

But Jan Schakowsky, a senior Democrat on the committee, said the provision would give tech companies “free reign to take advantage of children and families.” 

“This ban will allow AI companies to ignore consumer privacy protections, let deepfakes spread, and allow companies to profile and deceive customers using AI,” she added.