Tax-aware investing is often implemented reactively in response to a realized capital gains event, which can provide real value in offsetting gains in a given calendar year. But for many high-net-worth individuals and families, tax planning extends well beyond a single year. 

Managing large or recurring capital gains, liquidity events, estate planning, or legacy asset transitions often requires a multi-year strategy, one that enables sustained tax efficiency across changing market environments and evolving wealth plans. ¹ 

That’s where long/short overlay strategies come in. These structures are designed not only to harvest losses opportunistically, but to support proactive tax management over time, without disrupting a client’s core asset allocation. ¹ 

Short-Term Fixes Have Limits 

Most tax-loss harvesting occurs reactively when markets decline; advisors and platforms look to realize losses for clients. While effective in the right context, we believe this approach is: 

• Market dependent 

• Limited to long-only positions 

• Difficult to time alongside private investment or estate-related gains 

For investors facing recurring gains, large capital gains events, or looking to manage large unrealized capital gains, harvesting losses once per year isn’t always sufficient. 

Overlay Strategies and Tax Management

A long/short overlay is implemented as a market-neutral portfolio alongside the investor’s existing holdings. It is typically funded by using an existing pool of assets (e.g., appreciated stock, index ETFs) as collateral, without requiring their immediate sale to implement the strategy. ¹ 

We believe this structure can enable: 

• Consistent harvesting of tax losses across both long and short positions. 

• Alignment with a benchmark, to provide diversified equity market exposure. 

• Flexibility to defer capital gains over time by offsetting them with losses in the overlay. 

• Control over pacing, allowing investors to spread recognition of gains across multiple tax years. 

The overlay can serve as a structural engine for tax deferral, operating in rising, falling, or sideways markets. 

Real-World Use Cases 

We believe overlay strategies may benefit investors who: 

• Need to reduce a low-cost-basis equity position over multiple years. 

• Plan to offset future capital gains from business sales or real estate transactions. 

• Are transitioning portfolios ahead of retirement or wealth transfer. 

• Want to retain control over liquidity and reinvestment, without creating a tax drag. 

In each case, the overlay provides a parallel mechanism to manage the tax profile, without requiring major shifts to the investor’s long-term allocation or risk profile. 

Portfolio Design for Multi-Year Efficiency 

Because the overlay is constructed separately, it can be tailored to the investor’s evolving needs: 

• Tracking error constraints ensure the portfolio stays aligned with target benchmarks. 

• Margin and leverage limits are matched to the investor’s risk tolerance. 

• Realized losses can be banked (and carried forward) for use in future years. 

• Exit flexibility enables account restructuring or unwinding based on future liquidity, charitable, or estate goals. ² 

Over time, we believe this approach may reduce the overall tax drag on portfolio growth while increasing alignment between tax management and wealth planning. 

Risks for Consideration: These strategies provide broad exposure to public equity markets. Equity markets can be volatile and subject to sudden fluctuations in value. Such fluctuations, often driven by macroeconomic factors like recessions, interest rate changes, and inflation, can result in significant losses. These strategies make active investment decisions, which may result in significant deviations from a target benchmark. There is no guarantee that the manager will be successful in security selection, and the manager may deliver significant pre-tax under-performance versus their benchmark. These strategies utilize varying and significant degrees of leverage, which incurs variable borrowing costs, may increase volatility of returns and the severity of any losses, and may require additional outside collateral in the event of a severe market downturn (referred to as a “margin call”). These strategies will actively short equity securities, which carries both investment risk and additional expenses. Short securities may be subject to a “short squeeze”, which could result in significant losses in that security over a short period of time. Shorting securities involves borrowing costs and expenses which can be variable over time.

Conclusion 

Short-term tax strategies have their place, but for many investors, long-term wealth preservation requires more durable planning. 

A long/short overlay strategy provides a structure that can support tax efficiency across multiple years by harvesting losses persistently, managing gain recognition flexibly, and aligning with an investor’s portfolio and planning objectives. 

At IEQ Capital, we work with clients to integrate tax-aware overlays into their long-term planning, helping ensure tax strategy is not reactive, but built into the portfolio itself. 

If you are managing a multiyear transition or seeking more control over tax outcomes, we invite you to connect with our team to explore how an overlay strategy may fit into your broader plan. 

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This document is for informational purposes only and is intended exclusively for the use of the persons to whom it is delivered and the information provided therein is confidential and may not be reproduced in its entirety or in part, or redistributed to any party in any form, without the prior written consent of IEQ Capital, LLC (“IEQ” or “IEQ Capital”). Information contained in this document is current only as of the date specified in the document, regardless of the time of delivery or of any investment, and IEQ does not undertake any duty to update the information set forth herein. The information contained in this document does not constitute an offer to sell or the solicitation of an offer to purchase or sell any securities, including any securities or alternative investments recommended by IEQ. Regarding alternative investments, any such offer or solicitation may be made only by means of the delivery of a confidential private offering memorandum which will contain material information not included herein regarding, among other things, information with respect to risks and potential conflicts of interest. No representation is made that any client will or is likely to achieve its objectives, that IEQ Capital’s strategies, investment process or risk management will be successful, or that any client will or is likely to achieve results comparable to any shown or will make any profit or will not suffer losses or loss of principal. Investing involves risks. You should not construe the contents of this document as legal, tax, investment or other advice. Any tax-related decisions should be made after conducting such investigations as the investor deems necessary and consulting the investor’s own legal, accounting and tax advisers to make an independent determination of the suitability and consequences of a composite election.