Schwab Imposes New Limits on Tax-Aware Long-Short Investment Strategies
From the desk of Jim Eccleston at Eccleston Law
Charles Schwab Corp. has introduced new restrictions on tax-aware long-short separately managed accounts (SMAs), becoming the latest major custodian to tighten oversight of a rapidly growing investment strategy that relies on leverage and tax-loss harvesting.
According to AdvisorHub, Schwab informed its custodian RIA clients that assets of a particular client which are held at Schwab no longer may have more than a 30% long-short SMA position. The firm also established new leverage limits and minimum account requirements for new enrollments and incoming account transfers.
AdvisorHub reports that long-short SMAs seek to generate capital losses that investors can use to offset taxable gains. The strategy combines long and short positions and often utilizes leverage to increase the amount of tax losses generated. While investors view these strategies as a tax-management tool, the use of leverage can introduce additional risks, particularly for investors who have limited experience with margin-based investing.
The higher-leverage models often appeal to investors seeking to generate substantial tax losses following the sale of a business or a concentrated stock position that produced significant gains. According to AdvisorHub, the new restrictions reflect growing attention from custodians to the risks, operational complexities, and rapid expansion of leveraged tax-aware investment strategies.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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