Tax-focused investment strategies face increased Treasury scrutiny

What investors should know about Treasury's focus on tax-advantaged investment products

Certain investment strategies are designed to improve your after-tax returns by changing the timing or character of income, gain or loss. These strategies can be complex, and recent comments from Treasury officials suggest they may receive closer government scrutiny.

At a July 21, 2026, Wall Street Tax Association seminar, Treasury officials expressed concerns about several investment products designed to generate significant tax benefits, including products that generate ordinary tax losses. Officials indicated that the Treasury is actively reviewing these strategies and evaluating possible responses. However, they did not announce new guidance, regulations or enforcement actions.

While the rules have not changed, the comments are an important reminder that the expected tax benefits of a strategy may not remain available throughout the life of your investment.

Which strategies are receiving attention?

Treasury officials discussed several types of tax-focused investment strategies, including:

• Section 351 conversion strategies. These strategies generally involve contributing appreciated assets to an exchange-traded fund (ETF) without immediately recognizing gain.
• Box-spread ETFs. These investments use options to seek returns similar to Treasury bills while generating capital gain rather than interest income.
• Notional principal contract strategies. These contracts calculate payments by comparing a stated amount to an index or other measure. In certain circumstances, losses generated through these contracts may be treated as ordinary losses.
• ETF trading strategies intended to reduce or avoid dividend income.

Industry reporting has identified the AQR Delphi Fund as one example of an ordinary-loss strategy drawing attention. The Delphi strategy uses notional principal contracts as part of a tax-aware investment approach intended to improve after-tax returns.

Why does this matter to you?

The character of income, gain and loss can significantly affect the amount of tax you pay. For example, an investment strategy generating ordinary losses while producing income or gain taxed at lower capital gain rates could lower your tax rate by 13%. That difference may contribute to the strategy’s expected tax benefit.

The Treasury and the IRS have several ways to address transactions they believe produce inappropriate tax results. Those responses could include future guidance, regulations or enforcement activity. No such action was announced at the July seminar. It remains unclear whether any action will ultimately be taken and, if so, what form that action might take.

What should you consider if you already hold one of these investments?

If you currently hold a tax-focused investment strategy, the recent Treasury comments may not require an immediate change. They do, however, provide a reason to revisit your position. We would recommend that you:

1. Stay on top of current events to ensure that you understand any changes in the tax treatment.
2. Understand potential response options and the taxability should a change in investments be warranted. Some of these investments can be difficult to liquidate.

Tax considerations are only one factor in evaluating any investment strategy. You should discuss the tax and non-tax implications of any decision with your investment and financial advisors.

What should you consider before investing?

If you are considering a strategy designed to generate ordinary losses or convert ordinary income into capital gain, proceed carefully. While there is no change to current law, the Treasury can use comments like this as a stake in the ground for a change or potential enforcement action. In other words, the benefits you seek may not be guaranteed.