Tax Aware Long Short Investing - Too Good To Be True?

If you’re here, odds are you've been sold/told that Tax Aware Long Short Investing is a strategy you should implement to reduce the impact of large capital gains in a concentrated position. However, as much nodding and smiling as most people do when discussing complex strategies, I want to raise a few points that may not have come up in the sales presentation.

If you’d like to read the detailed version of these claims below, you can read the blog on Michael Kitces' website HERE.

Carrying costs of TALS are fairly high and increasing

This is due to the increased risk these custodians face for lending out an ever-growing amount of money in short positions that inherently carry more risk than long positions.

“The carrying costs of a Tax-Aware Long/Short (TALS) portfolio are comprised of the portfolio management fee (which may be 1% or 100bps), plus the net borrowing cost (which itself is comprised of the margin spread and short interest spreads charged by the custodian facilitating the margin account, and can often be another 80-120bps or more). Both of these costs scale up or down with the amount of leverage in the portfolio; e.g., while the carrying costs of a relatively lightly leveraged 130/30 TALS portfolio might be ~200bps × 30% equals "only" around 60bps of the original portfolio size, a more highly leveraged 300/200 portfolio could easily cost on the order of 350-400bps. Hence, TALS portfolio managers need to pursue an active management strategy to generate pretax alpha, not just as a way to legitimize the tax losses created by the strategy, but to overcome the substantial carrying costs (which increase in proportion to the size of the long/short extensions added to the portfolio).”

Custodians such as Fidelity and Schwab are increasing their borrowing costs for this strategy

“First, in December 2025, Fidelity announced that it would be instituting a pause on new client dollars going into TALS strategies on its platform, which became an indefinite pause in February 2026. Then, in March 2026, Fidelity began telling RIAs that it would be raising the net borrowing cost of TALS accounts, i.e., the margin interest minus short interest rebate, by substantially reducing the short interest rebate it was paying to effectively charge a much higher spread to compensate for its risk, such that some borrowing costs went from on the order of 60bps to over 150bps. Then Charles Schwab began to institute its own restrictions to TALS in April 2026 by (1) setting a 30% cap on the amount of assets in TALS strategies that any RIA can keep on the Schwab platform, (2) limiting the maximum extension size to 200/100 (i.e., a 100% long extension and a 100% short extension), and (3) setting minimum portfolio sizes for TALS accounts at $3 million for accounts where Reg T margin rules apply and $1 million for accounts with portfolio margin (with Reg T margin being a traditional margin account with static maintenance margin requirements while portfolio margin uses more dynamic margin requirements calculated based on the actual riskiness of the portfolio and is more often used for options trading).”

The managers of these strategies have to outperform the market.

With the stock picking that is taking place, plus the increased carrying costs, these strategies need to prove they are better than realizing gains and reinvesting. That hurdle rate becomes harder and harder to clear, especially when you're tasked not only with picking the right winners but also the right losers for each side of your long/short portfolio. And sustaining returns high enough to outperform the market over the same period the funds would have been reinvested.

“All of which brings up two main considerations for financial advisors using or considering TALS strategies for their clients. First, for advisors on the Fidelity platform specifically, the increase in net borrowing costs by nearly 100bps further increases the amount of pre-tax alpha that the TALS manager must generate with its strategy to overcome the higher carrying costs (and/or represents a greater cost drag that offsets more of the benefits from pursuing the loss harvesting strategy in the first place, relegating it only perhaps to clients with very large concentrated gains to harvest). Recall that underperforming the market over a years-long time horizon will leave an investor better off having sold their appreciated asset and paid the tax on it rather than investing in the TALS portfolio, and the ratcheting up in carrying costs increases the risk of this happening unless the portfolio is transferred over to a different custodian with lower net borrowing costs. To that end, it's worth remembering that in addition to Schwab and Fidelity, Interactive Brokers also provides custody for TALS strategies (and has not as of now announced any changes to its pricing or account requirements), while Goldman Sachs and Pershing are also reportedly building out their own TALS custody offerings to be available soon.”

Stepping over dollars to pick up dimes - The pain of paying taxes

People hate losing money more than they like making money. To the tune of ranking the discomfort of losing as 5x to 9x more painful than earning. That said, it’s a fairly easy sales opener to ask, "Would you like to pay less in taxes?" However, this leads companies through a massive amount of hoops and into costly strategies, where often the only person better off is the one charging for the tax strategy. I’ve seen this with cash balance plans, cost segregation studies, and now long/short tax strategies.

Often, if these strategies were free, they'd be a great plan, but the cost counters the underlying tax benefit and often ties the taxpayer up in long-term complexity they weren't anticipating.

This isn’t to say that these strategies aren’t for everyone. There are cases where it may make sense. But I believe they are less of a no-brainer than people think.