A strategy popularized by AQR Capital Management, the world's largest hedge fund, to help wealthy people slash their taxes on ordinary income is facing the most concrete sign yet that U.S. authorities are preparing to clamp down.
As part of an array of warnings to Wall Street on Monday, the Internal Revenue Service said it plans to publish guidance and may take other steps to bar certain trades that money managers are using to help clients harvest losses and lower tax bills on ordinary income.
AQR runs the best known strategy — dubbed Delphi Plus — aimed at producing that outcome. It's unclear whether its underlying trades and mechanics already work around concerns at the IRS, which pointed to certain types of currency bets and transactions combining equity swaps and futures as among those it's studying.
Representatives for AQR didn't reply to messages seeking comment. The firm has previously said it adapts strategies "to operate within all relevant guidance and regulations."
On Wall Street, the prospect of shielding ordinary income — subject to some of the highest tax rates — has come to be seen as the next frontier in tax-aware investing, which mainly has focused on helping the ultrawealthy slash capital-gains liabilities. For many, it's the "holy grail," said Orso Partners portfolio manager Nathan Koppikar, a short seller who has been betting that authorities would intervene.
If similar strategies could be applied to wages, salaries and bonuses, it would appeal to vast numbers of
"The total addressable market is huge if the Treasury doesn't do anything about it," said Daniel Hemel, a professor at New York University School of Law. It would be "carried interest on steroids," he said, referring to the controversial low rates that private equity executives long paid on their gains.
Monday's bulletin indicated that an array of tax-reducing tactics may soon face more scrutiny. In an additional publication, the agency also dealt with so-called 351 conversions, in which investors seed exchange-traded funds that later diversify their holdings without triggering tax bills.
Tax-aware long-short trading strategies have exploded in popularity, by some estimates attracting more than $150 billion in just three years. Many involve placing long and short bets on stocks, then exiting trades that lose money to lock in some losses for tax purposes. Profitable bets are kept running. AQR helped
In its notice, the IRS acknowledged that broad stock-focused strategies may comport with "long-standing, well established techniques" for reducing taxes.
AQR runs a spectrum of long-short strategies with different levels of risk to help users reduce their capital-gains taxes. But it has also pitched clients on ways to shield income derived from other sources.
The AQR TA Delphi Plus Fund, which had $6.6 billion at midyear, recorded ordinary losses in 2025 equal to 28% of capital invested, according to documents seen by Bloomberg.
Monday's announcement marked a significant formal escalation of concerns officials mentioned at an industry conference a few months ago in New York, where they said they were looking into investments geared toward reducing taxes by producing ordinary losses.
"Certain of these tax-aware funds appear to be primarily tax-motivated rather than being directed toward generating an economic return from genuine investment activity," the IRS wrote in the notice on Monday.
The agency also warned that any guidance it ultimately publishes could apply retroactively to transactions that already took place.
As the announcement went out, Treasury Secretary Scott Bessent added his own warning on X. The department, he said, "is serious about cracking down on transactions designed to dodge taxes or exploit our federal tax code."
