Five tax-smart strategies to cut client investment taxes

An analysis by Gregg S. Fisher found that taxes reduced S&P 500 returns from 1976 through 2025 by 45.4%, with annual pre-tax returns of about 11.67% falling to about 10.57% after taxes. The difference represents roughly a one percentage point annual tax drag that compounds over time. Wealth managers can apply several tax-aware strategies to reduce immediate tax bills or defer gain recognition.

One option is a Section 351 conversion that moves a concentrated stock portfolio into a newly launched exchange-traded fund. The exchange lets investors diversify positions and defer capital gains taxes. The original holdings must meet concentration limits: no single security can exceed 25% and the five largest positions cannot total more than 50% of the package exchanged.

Tax-aware long-short strategies offer another approach. In a 130/30 structure, managers short about 30% of assets and use margin to buy an additional 30%, creating roughly 130% long exposure. More aggressive variants such as 250/150 use higher leverage. These portfolios can be combined with active tax-loss harvesting to offset realized gains and provide flexibility on when gains are recognized for taxable clients.

Variable prepaid forwards let holders of concentrated stock obtain liquidity without an immediate taxable sale. An investor pledges shares as collateral in exchange for a loan and must deliver cash or stock at maturity according to contract terms. These contracts can hedge concentration risk and postpone a taxable event but create binding contractual obligations that advisers should review.

Options collars paired with margin loans are available to qualified purchasers in transactions typically valued at $1 million or more. An investor buys a protective put at a lower strike and sells a covered call at a higher strike, limiting downside while capping upside. Using margin alongside a collar can fund diversification or liquidity needs. The structure requires appropriate investor status and active monitoring of margin and option positions.

Direct indexing with tax-loss harvesting reduces taxes in taxable accounts by selling individual securities at a loss while maintaining similar market exposure. This method does not produce tax benefits inside qualified retirement accounts. High implementation fees can negate net tax advantages, so advisers should compare costs against expected tax savings and consider where a client’s assets are held.

Several strategies require specific eligibility and involve additional risks. Some require qualified purchaser status or minimum transaction sizes. Many use leverage, create counterparty exposure, or impose contractual obligations. Fees and the location of a client’s savings affect whether a strategy produces net tax benefits.

Fisher wrote that “tax management should be treated as an active discipline rather than a once-a-year afterthought,” and that portfolio managers who ignore tax consequences are effectively passive on tax matters. Advisers can change when and how taxes are realized by integrating tax consequences into security selection, trading decisions and portfolio construction.