Why More Alpha Can Mean More Tax Benefits

Tax-aware long-short strategies are more than just direct indexing with leverage and shorting. Our paper argues that pre-tax alpha can actually strengthen tax benefits, rather than erode them as it often does in long-only tax-loss harvesting.

Higher returns do reduce losses available for harvesting, but they also grow the portfolio faster and create new positions through rebalancing. Those fresh positions begin with little or no embedded gain, which can improve tax efficiency over time.

The result is that alpha may increase dollar-based tax benefits and lower the cost of moving a strategy from long-short to long-only. Still, the strategy only works if alpha exceeds financing costs, trading costs, and fees.

For investors and advisors, the key takeaway is clear: in tax-aware long-short portfolios, alpha is not a side benefit. It is central to both pre-tax performance and after-tax value creation.