Tax Traps Await Early SPAC Investors Without Ideal Timing, Luck

SPACs lure big-time investors partly with the promise of being able to cash out more quickly than they can with traditional IPOs.

But there’s potentially a big trap in what’s become Wall Street’s hottest investment: The blind nature of these pools can set up these investors for tax bills that could outsize their gains when they exit, unless they have luck and perfect timing on their side.

It’s becoming a growing concern for advisers who say the tax code hasn’t kept up with the soaring interest in SPAC deals, which totaled $83.9 billion in 2020 as investors like hedge-fund billionaires ...