IRS Eyes Limits on AQR-Linked Tax-Aware Trading

The Internal Revenue Service plans to publish guidance and may limit transactions that money managers use to generate losses that offset ordinary income. The agency identified some currency trades and structures that combine equity swaps with futures as subjects of review and referenced strategies linked to AQR Capital Management’s Delphi Plus.

The review focuses on tax-aware long-short investing, where funds hold offsetting long and short positions, realise losses for tax purposes and keep profitable positions in the market. AQR’s TA Delphi Plus Fund held about $6.6 billion in assets at midyear.

Industry estimates put investor capital in tax-aware long-short strategies at more than $150 billion over the past three years. While the approach has typically aimed to reduce capital-gains taxes, some managers have sought ordinary losses that can offset wages, bonuses and other forms of ordinary income.

The agency noted that broad stock-focused strategies can in some cases align with established tax-management techniques but expressed concern when tax outcomes appear to be the main motivation for a trade. The IRS did not provide a timeline for its guidance or specify which structures it may restrict.

Tax rules treat ordinary and capital losses differently: ordinary losses generally offset ordinary income directly, while capital losses are limited in how much they can reduce ordinary income. The upcoming guidance is intended to clarify where the line is drawn between accepted tax management and transactions driven primarily by tax effects.

AQR has previously indicated it adjusts strategies to comply with applicable regulations and guidance. The firm did not comment on the agency’s pending guidance when contacted.