US Treasury warns Wall Street tax strategies may be abusive

Justina Lee Wed, July 22, 2026 at 7:21 AM PDT 5 min read

(Bloomberg) — 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 morning in New York that the department considers 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.

Strategies Under Scrutiny

The strategies under scrutiny include:

• So-called 351 conversions
• Box-spread exchange-traded funds
• Products that offset ordinary income
• 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."

Broader Concerns Beyond 351 Conversions

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 specialized 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 realizing a capital gain. But Salinger and Nijenhuis made it clear that officials have a much broader focus.

Ordinary Loss Strategies Draw Attention

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 are epitomized by the AQR TA Delphi Plus Fund, which had $6.6 billion as of June 30 and last year recorded ordinary losses equal to 28% 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 $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 Inc., which owns a stake in AQR Capital Management, dropped 7% on Tuesday.

How Delphi Plus Generates Losses

Delphi Plus generates losses by taking advantage of the tax rules for notional principal contracts (NPCs), 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. However, 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 similar outcomes.

You can find the original article here. Subscribe to our free daily WealthManagement newsletters.