Treasury’s Tax Alpha Warning Echoes a Crackdown It Already Killed

Shares of Affiliated Managers Group fell 7% to $340.58 on Tuesday, hours after a Treasury official told a room of tax lawyers that some hedge fund strategies sold to wealthy investors look too good to be true. Kevin Salinger, Treasury’s deputy assistant secretary for tax policy, said his office has seen pitch decks promising roughly $300,000 in ordinary losses on a $1 million investment. He announced no new rule.

Treasury has run this play before. In 2024 it built a nearly identical case against a different maneuver, dressed it in the same “transaction of interest” label, finalized the rule, then killed it about fourteen months later after businesses complained. That history now hangs over every warning Salinger gives.

A Warning With No New Rule Attached

At a Wall Street Tax Association seminar this week, Salinger and Erika Nijenhuis, a senior counsel at Treasury, told an audience of tax lawyers and fund executives that the department will not look away from deals engineered to reach a result Congress never intended.

Salinger has spent his career on the other side of that table. He joined Treasury after a decade running Jefferies’ tax counsel practice, and he once served as vice president of the very association hosting Tuesday’s seminar.

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 this, adding that Treasury does not want to reward taxpayers or promoters who have crossed lines while punishing those who stayed within them. Officials named several specific structures they are watching.

• Section 351 conversions that move concentrated stock into a new ETF without an immediate tax bill
• Box-spread ETFs that use options combinations to reach for lighter capital-gains treatment
• Funds engineered to generate large ordinary losses that investors can apply against wages and other highly taxed income
• Strategies that hop between ETFs to avoid passing along taxable dividend income
• Swaps that produce an ordinary loss while a matching gain gets taxed at the lower capital rate

Officials stopped there. No guidance, no deadline, no rule.

The Market Moves First

Nobody told AMG’s shareholders to wait for a rule. Affiliated Managers Group, a holding company that owns stakes in boutique asset managers, saw its stock drop within hours of Salinger’s remarks. Analysts pointed to one reason: AQR is one of the larger contributors to AMG’s earnings, and AQR is exactly the kind of firm Treasury just put on notice.

More than $90 billion has flowed into hedge fund style tax-loss harvesting since 2025. That inflow is precisely what makes a stock like AMG sensitive to a speech with no legal teeth yet. A warning moved a share price before a single regulation existed.

How AQR and Quantinno Turned Losses Into a Product

Tax-loss harvesting itself is old news. Selling a losing position to offset a gain elsewhere has been standard practice for decades, and firms such as Morgan Stanley-owned Parametric have specialized in a long-only version for years. What changed is scale and technique.

AQR Capital Management, a $207 billion quantitative hedge fund, and Quantinno Capital Management, founded in 2018 by a group of former AQR traders, built something more aggressive. Both use leverage and algorithmic trading to buy and short securities at scale, systematically realizing losses that can offset gains anywhere in a client’s portfolio.

The pitch to investors is straightforward on paper. The fund still tries to beat the market, and it also manufactures losses along the way, losses a taxable investor can use immediately. Treasury’s concern is whether some of those losses are real economics or financial engineering wearing a market strategy’s clothes.

Why Is Treasury Eyeing 351 ETF Conversions?

A Section 351 conversion lets an investor move a concentrated stock position, often built up over years of gains, into a new ETF without triggering an immediate capital-gains bill. The tax is deferred, not erased, but it lets a shareholder diversify a risky, single-company fortune without an upfront tax hit.

• Transaction of interest – a formal IRS and Treasury label for deals officials suspect have tax-avoidance potential, which forces investors and advisers into extra disclosure and reporting.

Treasury first signaled interest in 351 conversions in late 2025, and by early 2026 it was meeting regularly with fund industry representatives and tax attorneys about what guidance, if any, to issue. One option discussed was slapping the transaction of interest label on the practice. Data tracked by Bloomberg found the average 351 fund replaced about 51% of its portfolio within the first year, compared with roughly 34% for ordinary mutual-fund-to-ETF conversions and 33% for actively managed ETFs never built through a 351.

A Crackdown Treasury Already Reversed Once

This is not Treasury’s first attempt at labeling an aggressive tax maneuver a transaction of interest. It tried something almost identical two years ago, and the ending is instructive.

1. June 18, 2024: Treasury and the IRS propose calling certain partnership related-party basis-shifting deals a transaction of interest.
2. January 14, 2025: The rule is finalized as TD 10028, six days before the Biden administration leaves office.
3. April 17, 2025: The incoming Trump Treasury issues Notice 2025-23, announcing plans to undo the rule and waiving penalties for participants in the meantime.
4. March 6, 2026: Treasury formally erases the basis-shifting disclosure rule after businesses complained the compliance burden was too heavy.

The same Treasury now warning about tax alpha spent 2025 dismantling a nearly identical crackdown on a different maneuver, under the same administration. That is the precedent hanging over Salinger’s remarks this week, whether or not anyone in the room mentioned it out loud.

The Fund Industry Asks for Clarity, Not a Ban

The Investment Company Institute, whose members oversee more than $45 trillion across mutual funds, ETFs and other fund structures, filed a rare comment letter with Treasury in May asking for formal guidance on 351 conversions rather than a crackdown.

“Guidance would provide necessary tax certainty for our members who engage, or may consider engaging in section 351 transactions for legitimate business reasons,” Katie Sunderland, the ICI’s associate general counsel for tax law, wrote in the May 29 letter. The group has argued against a broad ban, saying 351 conversions serve real purposes beyond tax deferral, including portfolio diversification and lower fund costs.

Fund Sponsors Keep Building Anyway

Uncertainty has not stopped the market from moving. One ETF strategist told Bloomberg that marketing pitches for new 351 launches keep arriving regardless, a sign sponsors expect demand to outrun whatever rule eventually lands. Other firms are more cautious. One advisory firm said it decided not to sponsor a 351 conversion for now, citing the added Treasury and IRS scrutiny, while leaving the door open to revisit the decision later.

Treasury has not set a date for any decision on 351s, box spreads or the leveraged tax-loss harvesting funds it named this week.

Frequently Asked Questions

What Does Tax Alpha Actually Mean?

Tax alpha describes the extra after-tax return an investor captures by managing taxes actively rather than by beating the market on a pre-tax basis. J.P. Morgan’s own wealth-planning research describes the effect of parking high-turnover assets in tax-deferred accounts, one of the simpler versions of the same idea now being run at hedge fund scale.

Is Hedge Fund Tax-Loss Harvesting Illegal?

No. Selling a losing position to offset a gain is a decades-old, fully legal practice. The wash sale rule blocks investors from claiming a loss if they buy a nearly identical security within 30 days, a guardrail that leveraged tax-loss harvesting funds are built to navigate at scale rather than break.

What Penalties Did Treasury Waive on Basis Shifting?

Notice 2025-23 said the IRS would waive penalties for taxpayers and advisers who had participated in the basis-shifting transactions Treasury had labeled a transaction of interest just months earlier, effectively holding them harmless once the rule was scrapped.

How Big Is the Tax-Efficient Investing Industry?

Beyond the roughly $90 billion tied to leveraged hedge fund style harvesting, more than $1 trillion sits in tax-efficiency strategies broadly, ranging from simple ETF structures to the complex hedge fund portfolios Treasury is now scrutinizing.

Which Other Firms Run Tax Alpha Strategies?

AQR and Quantinno are the names Treasury cited, but commentary on the trend has also pointed to Two Sigma as among the quantitative firms with the trading infrastructure and credible market-beating track record needed to sell a tax-aware version credibly.

Disclaimer: This article covers tax and investment topics for informational purposes only, is not tax or investment advice, and figures are accurate as of publication; readers should consult a licensed tax professional before acting on any strategy named here.