Tax-Adjusted Alpha represents an investment strategy’s outperformance relative to a specific benchmark, precisely quantified after accounting for the impact of taxes on the generated returns. It provides a more accurate measure of a portfolio manager’s skill by reflecting the net return available to the investor.
Mechanism
This metric is calculated by taking the gross alpha generated by an investment and then deducting the tax liability incurred on the gains that produced that outperformance. For crypto assets, this calculation is complicated by the varied tax treatments—such as capital gains, income, or property taxes—that apply across different jurisdictions and asset types.
Methodology
The methodology involves systematically tracking all taxable events, including asset sales, staking rewards, or airdrops, and applying the relevant jurisdictional tax rates to accurately calculate the total tax drag on returns. Investment strategies are then optimized not merely for pre-tax alpha, but for after-tax alpha, by considering techniques like tax-loss harvesting, deferral strategies, and the efficient structuring of asset dispositions.
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