An Innovative Approach to Tax Efficiency
Major wealth events, including the sale of a business or a substantial stock distribution, can create meaningful opportunities while introducing significant tax considerations. STEP is designed to transform tax complexity into opportunity. This tax-advantaged long/short approach seeks to offset taxable gains by generating investment losses, allowing investors to stay fully invested while preserving capital, deferring near-term taxes, and navigating these transitions with greater control and flexibility.* In addition, one component of STEP seeks to generate tax-efficient income through covered calls while enhancing tax-loss harvesting opportunities within the same account.
*Results are not guaranteed. All investments involve risk. This material is for informational purposes only and should not be considered tax advice. Investors should consult their tax advisor.
Turning Tax Complexity Into Opportunity
STEP Benefits Investors With The Following Goals:
- Seeking enhanced after-tax returns compared to a passive benchmark.
- Navigating ownership and tax planning considerations across business interests, low-basis stock, and trusts with long-held stock.
- Diversifying “frozen” positions with large capital gains without incurring capital gains taxes.
- Seeking tax-efficient income via covered calls, leveraging enhanced tax-loss harvesting within the same account.
The Shelton Advantage
Built on nearly two decades of customized, concentrated stock management, we combine our options and quantitative expertise to offer tax-aware, personalized solutions for advisors and their clients. This allows advisors to provide the potential for tax-efficient income and diversification in one account.
Common Questions
A long/short approach to tax-loss harvesting expands the number of positions that can generate harvestable losses, which can support more consistent tax-loss harvesting opportunities across a wider range of market environments. In contrast, long-only tax-loss harvesting strategies depend more heavily on market declines to realize losses, which limits the strategy’s ability to generate tax-related alpha in flat or rising markets.
A 150/50 extension portfolio is an actively managed equity strategy that combines long and short positions to give the manager more flexibility while maintaining a net equity exposure comparable to a traditional long-only portfolio.
For every $100 invested, the strategy typically holds $150 in long positions and $50 in short positions, resulting in 100% net exposure and 200% gross exposure.
The short positions serve two purposes: they help finance the additional long exposure, and they allow the portfolio manager to express negative views on certain securities.
This structure expands the opportunity set by enabling both overweights and underweights relative to the benchmark. While the strategy uses leverage, it is designed to maintain core equity market exposure while allowing for a broader range of active return potential.
A 200/100 extension portfolio uses long and short positions to expand the opportunity set while keeping net equity exposure similar to a traditional portfolio.
For every $100 invested, the portfolio typically maintains $200 in long positions and $100 in short positions, resulting in 100% net exposure and 300% gross exposure.
The short positions help finance the additional long exposure and allow the manager to express negative views on selected securities.
This structure provides greater flexibility by significantly widening the range of positions that may contribute to overall results. While leverage is higher than a 150/50 structure, the net exposure remains comparable to a standard equity allocation.
A 250/150 extension portfolio expands the manager’s opportunity set by pairing active long exposure with offsetting short positions, enabling more precise active expression of investment views across sectors, industries, and individual securities.
For every $100 of capital, $250 in long positions and $150 in short positions are typically held in the portfolio, producing 100% net exposure and increasing gross exposure 100%.
As with other extension strategies, the short sales help fund additional long exposure while providing a tool to underweight or avoid less-attractive securities without fully exiting relative benchmark positions.
The expanded gross exposure greatly increases the range of securities that may contribute to performance or risk management across market environments. Although this structure uses a higher level of leverage, its net exposure remains aligned with a core equity allocation, making it a potential complement within tax-aware, actively managed equity portfolios.
The stated minimums are $500,000 per account.
Onboarding with Shelton Capital Management is designed to be a high-touch, streamlined experience. For advisors integrating Shelton’s specialized investment strategies into their practice, portfolios require custodian setup and completion of a standard onboarding form. Advisors can expect Shelton to provide guided support through every phase. This includes onboarding, transition analysis, reporting, and service requests.
Contact Us for More Information
We have a team of professionals dedicated to supporting the needs of our advisor clients.
Important Information
It is possible to lose money by investing in this strategy. Investors should consider a strategy’s objectives, risks, charges and expenses carefully before investing. An investment in the strategy is generally subject to market risk, including the loss of the entire principal amount invested. Past performance does not guarantee future results. There is no assurance that similar performance results will be achieved by the Advisor. Results may differ because of, among other things, differences in brokerage commissions, account expenses including management fees, the size of positions taken in relation to account size, diversification of the account, timing of purchases and sales and availability of cash for new investment.
The information was carefully compiled from internal data, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. None of the examples should be considered advice tailored to the needs of any specific investor or a recommendation to buy or sell any securities. Investing involves risk, including possible loss of principal.
Asset allocation and diversification may not protect against market risk, loss of principal, or volatility of returns. With respect to the description of any investment strategies, we cannot provide any assurances that they will perform as expected and as described in our materials. Past performance is not indicative of future results. Every investment program has the potential for loss as well as gain. Shelton’s fees may be higher than other advisors’ fees. Please ask for a copy of our Form ADV (including our brochure) for details.
Any tax information provided herein is for illustrative purposes only and does not constitute the provision of tax advice by Shelton Capital. Due to the complexity of tax law, not every single taxpayer will face the situations described herein exactly as calculated or stated; i.e., the examples and calculations are intended to be representative of some, but not all, taxpayers. Since each investor’s situation may be different in terms of income tax, estate tax, and asset allocation, there may be circumstances in which the calculations would not apply.
Please discuss any individual situation with tax and investment advisors first before proceeding. Those clients using tax-advantaged indexing, taxpayers paying lower tax rates than those assumed, or investors without taxable income would earn smaller tax benefits from tax-advantaged indexing (or even none at all) compared to those described. Shelton Capital cannot guarantee the accuracy of the data disclosed by companies or the estimates made by third-party vendors when data are missing.
Simulation Analysis
•These represent simulated results of the Shelton Capital Active Extension strategy for US stocks.
•The results in this simulation represent a portfolio built with Shelton Capital’s proprietary stock selection methodology, and to track the SPDR S&P 500 ETF Trust (SPY).
•Trading and transaction costs are not included in the returns for the simulated portfolios.
•Any losses in the portfolio are sold and replaced with positions with similar performance characteristics. Once the 30-day wash period has expired, the position can be bought back into the portfolio.
•The simulations are performed on the Axioma Portfolio software, and source data and returns from Axioma. All taxes are calculated by this system and included in the performance totals.
High Portfolio Turnover Risk: The portfolio may buy and sell securities without regard to how long they have been held when the adviser determines such transactions are in the client’s best interest. Frequent adjustments to long and short positions can result in a high portfolio turnover rate, which for this strategy may exceed 100% annually. High turnover generally increases brokerage and other transaction costs, may generate adverse tax consequences, and can reduce overall returns. In particular, frequent trading may result in larger distributions of short-term capital gains, which are taxable as ordinary income to investors.
Leverage: The use of leverage increases a portfolio’s exposure to investment risk. Leverage may be obtained in various ways, including through the investment of short sale proceeds to purchase additional securities. This practice increases total investment exposure beyond the portfolio’s capital and magnifies the potential impact of changes in the value of portfolio holdings. While leverage can increase the potential for gains, it also increases the potential for losses, which may be greater than if leverage were not used. Losses on short positions, which may be used as a source of leverage, are theoretically unlimited if the price of the security increases.
Leverage obtained through short sale proceeds or other means is typically secured by pledging portfolio securities as collateral. If the value of pledged securities declines, the portfolio may be subject to a margin call, requiring the deposit of additional cash or securities, or the liquidation of positions at unfavorable prices. Margin requirements may be increased at any time by banks or brokers, which can result in large margin calls, losses, or forced sales. There is no assurance that adequate margin can be maintained, and the use of leverage may also result in higher transaction costs and other expenses.
Short Selling Risk: Short selling involves selling securities borrowed from a third party with the expectation that the market price will decline, enabling the security to be repurchased later at a lower price and returned to the lender. The potential loss on a short sale can exceed the initial proceeds received, as the price of the borrowed security may increase, requiring repurchase at a higher cost. Losses are further increased, and gains reduced, by any premiums or interest paid to the lender. While gains are limited to the price at which the security was sold short, losses are theoretically unlimited. Government actions or market events may also restrict or prevent short selling.
Short selling may involve expenses not typically associated with purchasing securities directly, including borrowing fees and margin account maintenance costs (sometimes referred to as “negative cost carry”). These expenses can reduce returns and may result in a net loss even if the price of the borrowed security does not change. In addition, the strategy may be unable to borrow a required security, close out a short position at a desirable price, or may be forced to sell other holdings sooner than desired to meet obligations arising from short positions.
