Published Wed, Jul 22, 2026 · 07:44 AM
THE US Treasury Department has expressed concern over a number of high-profile tax strategies touted by Wall Street that it says may be “too good to be true.”
Officials told an industry gathering on Tuesday (Jul 21) morning in New York the department considers that some of these products may be abusive, and said it is actively evaluating the tools available to address them.
However, they stopped short of announcing new guidelines, saying instead they “expect a serious dialogue with the market before positions harden” and investors are placed at more risk.
The strategies under scrutiny include so-called 351 conversions, box-spread exchange-traded funds, products that offset ordinary income, and funds that avoid dividend income by flipping between other ETFs.
Speaking at a Wall Street Tax Association seminar, Kevin Salinger, deputy assistant secretary for tax policy at the Treasury, and Erika Nijenhuis, senior counsel, said the department has no wish to over-engineer rules, but it cannot ignore a market developing around transactions with results Congress did not appear to intend.
“We’re not here to be over-broad or disruptive, but we are also not prepared to turn the blind eye to aggressive planning,” Salinger said. “We do not want to act in a way that rewards taxpayers or promoters who have crossed lines that should not be crossed and disadvantages taxpayers who have stayed within the lines.”
The comments come amid a boom in transactions and products that help wealthy American investors reduce or delay the taxes they owe.
Known as tax alpha strategies, they largely deploy financial engineering to take advantage of various rules in the US tax code. They are chiefly focused on capital gains, though a few specialised products have even managed to offset regular income.
The Treasury has previously voiced concern over the growing use of 351s, which involve converting a portfolio of assets into an ETF to rebalance without realising a capital gain. But Salinger and Nijenhuis made it clear that officials have a much broader focus.
Funds that generate ordinary losses are among the more controversial in the tax-aware industry, since they aim at wiping out income subject to the highest tax rates, including wages.
They’re epitomised by the AQR TA Delphi Plus Fund, which had US$6.6 billion as of Jun 30 and last year recorded ordinary losses equal to 28 per cent of capital invested, according to documents seen by Bloomberg News.
“We have seen pitch decks where they advertise that if you invest a million dollars, you may get a US$300,000 ordinary loss,” Salinger said, without naming any products or money managers. “I would advise investors to be cautious when something looks too good to be true because it probably is.”
Affiliated Managers Group, which owns a stake in AQR Capital Management, dropped as much as 6 per cent in early afternoon trading.
Delphi Plus generates losses by taking advantage of the tax rules for notional principal contracts, the legal term for swaps.
In a swap, the payments are ordinary in nature, which means ordinary losses arise whenever an investor has to pay their counterparty for a losing bet. But when a position is terminated early, it can be booked as either a capital gain or loss.
At the seminar, the two Treasury officials raised concerns over the way NPCs can be used to selectively create ordinary losses and capital gains for similar economic transactions.
They also discussed other methods that give rise to ordinary deductions, including so-called identified straddles and a rule that lets a trader elect whether a foreign-currency derivative position should receive ordinary or capital treatment.
Salinger and Nijenhuis also covered various ways the rebalancing mechanism of ETFs — which enables them to offload appreciated assets without incurring capital gains — can be used to avoid taxes.
While such in-kind transactions alone are not a problem, they can be combined with other steps to produce a result that appears “inconsistent with what Congress intended,” Salinger said.
He specifically mentioned 351 conversions where the redemption mechanism is used to dispose of appreciated securities which are then replaced with positions that fit in the product’s intended strategy. He also homed in on deals where stocks are first contributed to an exchange fund, which then conducts the ETF conversion.
When asked about possibly labeling 351 exchanges as “transactions of interest” — a designation for deals with tax-avoidance potential that would require additional disclosure — Salinger said “all the tools are under consideration for all of the transactions that we’re going to talk about today.”
The two officials also discussed ETFs that trade in and out of other ETFs in order to avoid dividend distributions, as well as box-spread ETFs.
The largest of the latter is the US$13 billion Alpha Architect 1-3 Month Box ETF, which uses option trades to generate returns similar to Treasury bills that are taxed as capital gains on the ETF, rather than interest income.
Salinger will be acting assistant secretary for tax policy at the Treasury as well as acting IRS chief counsel after the departure of Kenneth Kies, Bloomberg Tax reported on Tuesday, citing a Treasury email. BLOOMBERG
