If you understand a small handful of tax-code concepts, most of tax-aware portfolio management stops looking mysterious.
This is the practical cheat sheet. Not every rule in the code matters equally. These are the ones that keep showing up in real TLH, direct indexing, and overlay decisions.
The four sections that matter most
| Section | What it governs | Why investors should care |
|---|---|---|
| §1091 | Wash sales | Determines whether a harvested loss is actually usable |
| §1014 | Basis step-up | Changes the long-term value of deferral and holding appreciated assets |
| §1233 | Short-sale character | Matters for any strategy that introduces a short overlay |
| §1259 | Constructive sales | Prevents certain offsetting trades from avoiding gain recognition |
§1091, the wash-sale rule
This is the rule most investors have at least heard of, usually in a very incomplete way.
The basic issue is simple: if you sell at a loss and buy the same or substantially identical security inside the relevant window, the loss is disallowed.
Why it matters: this is the rule that separates real harvesting from fake harvesting. If a product cannot handle wash-sale logic competently, it is not serious.
Read the deeper article here: The wash-sale rule, demystified.
§1014, basis step-up
This is the long-horizon rule investors tend to underweight. Basis step-up is one of the reasons deferral can be far more valuable than it first appears.
Why it matters: the investor should not think about tax-aware investing only in one-year increments. The estate path can change the real economics substantially.
Read the deeper article here: The step-up in basis.
§1233, short-sale character
This is where things start to matter for more advanced structures. Short positions are not taxed the same way as ordinary long-only holdings, and anyone talking about a short overlay needs to understand that the character of gains and losses behaves differently.
Why it matters: if you add a short sleeve, you did not just add complexity in the market. You also changed the tax character conversation.
§1259, constructive sale
This is one of the rules that blocks naive attempts to "hedge without consequences" in certain cases. If an investor is trying to neutralize a gain with a tightly offsetting position, the constructive-sale concept can matter a lot.
Why it matters: sophisticated-looking overlays can create tax recognition if the system is not designed carefully.
The supporting concepts worth remembering
There are also adjacent rules and concepts that are not always the headline, but still matter:
- capital-loss carryforwards
- short-term versus long-term character
- retirement-account boundaries
- charitable donation of appreciated assets
These are not side notes. They shape what a user can actually do with the losses they generate.
Why this matters for software
A real tax-aware product is not just a market-data product with a few tax words on top. It is a rule-checking system.
Every proposed trade should be able to answer questions like:
- does this create a wash-sale problem
- what kind of gain or loss character is involved
- does this collide with a more advanced constructive-sale issue
- how does this fit into the user's broader tax path
That is why HarvestEngine should feel like a portfolio operating system, not just a signal feed.
The honest takeaway
Most investors do not need to memorize code sections. They do need to understand the handful of rules that keep determining whether a tax-aware move is smart, neutral, or counterproductive.
That is the point of this cheat sheet. It turns the legal scaffolding into something operational.
Read this next with TLH 101, the wash-sale explainer, and the step-up article.