Loukia Gyftopoulou, Paige Smith & Charlie Wells (Bloomberg): The Ultrawealthy Tax Maneuver That’s Spooking Schwab and Fidelity
For months, the brokerage had piled into one of the hottest trades on Wall Street: “tax-aware long-short” accounts, which are helping legions of wealthy investors whittle down their tax bills. Millionaires love it so much they’ve poured roughly $150 billion into such strategies in just three years, by some estimates, and the tally is growing by the day.
At Schwab, revenue from the business climbed to roughly $70 million by the second quarter, but executives were becoming concerned that it was growing so fast the situation could get out of hand quickly. If things went awry, the thinking went, Schwab would be on the hook — or, worse, they’d find themselves in the middle of a shock to the market.
So instead of popping the bubbly, the 55-year-old company is pulling back on what’s becoming the next great American tax dodge.
“There’s no other reason to do it than avoid paying taxes,” said Sheila Bair, former chair of the US Federal Deposit Insurance Corp. who helped clean up the banking industry in the aftermath of the 2008 financial crisis. “There’s risk for the firms offering this.”
In April, and then again in June, Schwab tightened the screws on who can set up tax-aware long-short accounts on its platform.
The tax-aware long-short strategy sits on the cutting edge of the $1 trillion “tax alpha” universe that, through hosts of products, helps rich people postpone or eliminate capital-gains taxes. The strategy is engineered to create losses alongside long-term gains by betting both on and against companies. It’s intended to save the wealthy from paying taxes on big capital events — whether it’s piling up a fortune from private equity, selling a company or making a killing in the stock market — money that would otherwise go to the government.
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