The U.S. Treasury Department and IRS announced on Monday, September 28, 2026, a significant move to curb various tax-avoidance strategies popular on Wall Street. These strategies, often dubbed "tax-aware investing," have been scrutinized by officials who previously labeled them "potentially abusive" and "too good to be true" during an industry seminar in July. The IRS issued Notice 2026-62, outlining its intent to publish guidance and potentially take other steps to restrict certain trades that money managers utilize to help clients reduce tax liabilities on ordinary income.
One prominent strategy under fire was popularized by AQR Capital Management, the world's largest hedge fund, known as Delphi Plus. This strategy assists wealthy individuals in significantly cutting taxes on ordinary income by generating artificial losses through financial instruments like swaps and currency derivatives. The IRS's announcement represents the most concrete indication yet that authorities are preparing to clamp down on such practices, which involve harvesting losses to offset tax bills.
The IRS notice specifically identified investment fund strategies that leverage I.R.C. §852(b)(6) and related provisions in ways that produce tax results inconsistent with federal rules. This includes atypical uses of rules applicable to exchange-traded funds (ETFs), such as I.R.C. §351 conversion transactions where appreciated securities are contributed to ETFs. Other strategies mentioned include partnership exchange funds, box-spread funds designed for economic returns without immediate income recognition, and record-date strategies to avoid dividend income. The IRS stated it intends to target specific abusive transactions while minimizing compliance burdens for conventional tax planning.
The Treasury Department also took action against an "ETF maneuver" known as "351 conversion transactions," limiting its tax benefits through a related revenue ruling. The IRS emphasized that it may challenge abusive investment fund strategies during examinations and will consider varying factual scenarios. This broader crackdown signals a determined effort by U.S. authorities to address complex financial strategies that they believe exploit loopholes to avoid reporting income or gains, with more guidance expected to follow.
