Why ‘Tax Alpha’ Is Silicon Valley’s New Obsession

Brent Sullivan, a Seattle-based author of an influential newsletter on taxes and personal finance for the wealthy, got an urgent call last month from a longtime SpaceX employee.

The employee was sitting on a tidy nest egg from their newly public SpaceX stock and thinking about how to liquidate tens of millions of dollars in shares without incurring a hefty tax bill. Sullivan, who calls his newsletter “Tax Alpha Insider,” talked with the SpaceXer about the nuances of an increasingly popular maneuver: tax-loss harvesting, a somewhat complex series of stock market bets that can eliminate the taxes that result from selling a chunk of equity.

“In Silicon Valley, the mindset has completely shifted from resistance to professional financial services into, ‘Oh, I should start thinking really hard about this stuff,’” said Sullivan, a former Zillow software engineer and portfolio associate at Pimco, the giant asset manager. (He also runs a new conference series, Basis, on wealth and tax-management strategies.) “For people who like to think strategically—like poker players, Magic: The Gathering players, Pokémon players—tax management is very appealing.”

As Silicon Valley’s prosperity grows due to the AI boom, the wealth advisers and money management firms hoping to win the industry’s superrich as clients are pitching them on an array of tax-minimization strategies. The age-old quest to reduce taxes has been turbocharged by top-notch analytics and sophisticated software—and rebranded with a catchy moniker: tax alpha.

These advisers have found a receptive audience in tech, as the place that has tried to cheat death now hopes to overcome life’s other proverbial certainty, too. Tax alpha seems likely to find even more interest in Silicon Valley as increasing numbers of people find themselves with piles of valuable equity—especially if major IPOs like those of Anthropic and OpenAI go off well and open the floodgates for more offerings.

“Everyone in the whole financial supply chain is like, ‘Tax alpha, tax alpha, tax alpha,” said Shang Chou, a financial adviser and founder of Pasadena, Calif.–based Dishmi Capital, with clients who work at companies including OpenAI and Anthropic.

Wealth advisers are pitching a slew of possible ways to embrace tax alpha, including customized bond portfolios, complicated options trades and charitable giving options like donor-advised funds.

But no tactic is more central than tax-loss harvesting, experts said. When I spoke to another recently minted SpaceXer multimillionaire, that person described how it was a main component of the pitches he received from top wealth management firms in the months before the company’s IPO. This person said they thought the strategy was unsavory.

“It’s kind of a bummer to see the things that only rich people get access to and to look around the world and think all these people don’t have access to this tool,” said the person, who asked that their name not be used in this story. “They’ve got all these crazy vehicles, and that’s one of them.”

The person said they were mulling over whether to use the strategy.

Tax-loss harvesting can be done by someone on their own. But most people leave it in the hands of a money manager, since it requires a high level of attention to stock-price fluctuations and other market dynamics.

There are two main strategies. In the first and most popular, direct indexing, wealth managers buy all the equities that comprise a stock index such as the S&P 500 for a client. As some of those stocks gain value, the decreases in other equities are written off as tax losses—reducing the ultimate tax bill a SpaceX client would pay as they also sell their SpaceX stock.

The second strategy is increasingly popular and riskier—and even more wonkily named: tax-aware long shorting. Advisers borrow money leveraged against the client’s core stock holding to buy a separate portfolio of equities split into two categories: stocks expected to outperform the market over the long term and a smaller collection of stocks expected to perform poorly in the short term and become tax write-offs. The portfolio is thus positioned to incur some losses regardless of which way the market moves. (This strategy has more varied outcomes—and therefore more risk—than direct indexing.)

“It’s probably the hottest topic in the industry this year,” said Brendan Powers, a director at Cerulli Associates, a financial research firm.

The data show how tax loss harvesting strategies have exploded in recent years.

Direct indexing has become the most popular investment strategy in separately managed accounts, the individualized portfolios of stocks and bonds often favored by family offices and investors, according to research from Cerulli. Some $1.2 trillion has been put toward direct indexing within those accounts in the U.S.—dwarfing the $800 billion or so going into municipal bonds and the $200 billion devoted to traditional stock investments, according to Cerulli.

While tax-aware long shorting is less widely used, it has been growing rapidly over the last year and a half, experts said, and it accounts for at least $116 billion, according to Cerulli. Two companies oversee the vast majority of that capital: Connecticut-based AQR Capital Management and Quantinno, a New York City firm founded by a former AQR principal in 2018, which together manage about 88% of the market for tax-aware long shorting.

Ehren Stanhope, chief investment strategist at San Mateo, Calif.–based firm Franklin Templeton, said maneuvers to harvest tax losses were primarily techniques employed by hedge funds 10 years ago. “The unlock that made this much more possible is that the major financial custodians made it a mass-market offer,” he said.

Financial firms have been working hard to popularize tax alpha far and wide. Goldman Sachs, for example, just launched tax-loss harvesting services in the U.K. “I don’t think any other competitor has that yet,” said Nishi Somaiya, the firm’s global co-head of wealth management.

Chou, a co-founder of Dishmi Capital, sounded a note of wariness regarding tax alpha’s proliferations, saying he worries the strategies are often marketed without adequate explanations of the risks. Part of that risk lies in the price stability of a client’s core stock holding—the shares that get used to secure the borrowed money fueling some tax alpha moves.

He thinks returns should be the emphasis for investing, with tax management a secondary concern. “My view on the zeitgeist is, we should be going the other way: How do we really deliver pre-tax results?” he said.

There is also the question of IRS attention, particularly after a high-level Treasury Department official sounded a warning last month about aggressive loss harvesting methods at a Wall Street seminar. The economic substance doctrine, a tax rule developed by the courts and later codified by Congress, prohibits transactions whose primary purpose is to reduce taxes rather than generate meaningful economic gains, for example.

“Periodically, there are fads in aggressive tax avoidance where everybody seems to think that they’ve found the next big thing until it becomes clear that it doesn’t work, and there’ll be repercussions for all involved,” said Darien Shanske, a tax law expert at the University of California, Davis. “A cool name doesn’t make it new. It’s very old. It also doesn’t make it cool.”

Not everyone agrees, including Sullivan, the “Tax Alpha Insider” newsletter author.

“It’s easy to be like, ‘Look at all these guys dodging these taxes,’” he said. “But as soon as you realize that this is a matter of strategy and thinking deliberately about wealth management, then it becomes a lot less sensational. This is what stewardship and diligence looks like.”