Rule Atlas
IRC § 1091: Tax-Efficient Investing: Harvesting, Rebalancing, and the Wash Sale Rule
Under IRC § 1091 (CFP Board / IRS / SEC), tax-Efficient Investing: Harvesting, Rebalancing, and the Wash Sale Rule establishes the authoritative rules tested on the CFP® Certification. A comprehensive lesson on integrating tax-loss harvesting and portfolio rebalancing to manage capital gains. VoraPrep verifies every threshold, worked table, and practice question below against the current CFP® Certification blueprint.
The Capital Gain and Loss Netting Process
| Step | Action | Example | Result |
|---|---|---|---|
| 1 | Net Short-Term (ST) Gains and Losses | +$50,000 STCG, -$20,000 STCL | Net $30,000 STCG |
| 2 | Net Long-Term (LT) Gains and Losses | +$10,000 LTCG, -$18,000 LTCL | Net ($8,000) LTCL |
| 3 | Net the Results of Steps 1 & 2 | Net $30,000 STCG vs. Net ($8,000) LTCL | Net $22,000 STCG |
| 4 | Apply Ordinary Income Deduction | If the final result is a net loss (e.g., Net ($5,000) STCL) | Deduct $3,000 from ordinary income |
| 5 | Carry Forward Excess Loss | From the example in Step 4 | Carry forward ($2,000) STCL to next year |
Michael, 48, is reviewing his taxable brokerage account for tax-loss harvesting opportunities in December. He identifies a mutual fund, 'GlobalTech Growth Fund,' which he purchased for $20,000 and is now valued at $15,000. He wants to sell the fund to realize the $5,000 capital loss but wishes to maintain exposure to the global technology sector. Which action would best allow Michael to harvest the loss while maintaining his desired market exposure and avoiding the wash sale rule?
Worked Example: Example: Applying Tax-Loss Harvesting for Amelia
Scenario: Let's return to Amelia and her $50,000 short-term capital gain. You review her portfolio and find an investment with an unrealized loss.
- Asset: Total International Stock ETF (VXUS) Cost Basis: $80,000 Current Market Value: $65,000 Unrealized Loss: ($15,000)
- Action Plan: 1. Sell: You advise Amelia to sell her entire position in the Total International Stock ETF, realizing a $15,000 short-term capital loss (assuming it was also held less than a year). 2. Offset: This $15,000 STCL is used to directly offset her $50,000 STCG. 3. Result: Her net taxable short-term capital gain is reduced from $50,000 to $35,000 ($50,000 - $15,000). 4. Tax Savings: Assuming Amelia is in the 32% marginal tax bracket, this saves her $4,800 in federal taxes ($15,000 × 0.32). 5. Reinvest: To maintain her international exposure and avoid a wash sale, you immediately reinvest the $65,000 proceeds into a Developed Markets ex-US ETF (like one tracking the MSCI EAFE Index). This is a different, non-substantially identical security.
- Therefore, the correct recommendation is to harvest the loss and reinvest in a similar but not identical fund, immediately reducing her tax liability.
- The tempting-but-wrong answer on an exam question might be to wait 31 days to repurchase the exact same ETF (VXUS). While this avoids a wash sale, it leaves the client's portfolio unallocated to international stocks for a month, creating tracking error and violating the principle of maintaining the strategic asset allocation. Reinvesting immediately into a non-identical replacement is the superior strategy.
Common CFP® Certification Distractors on IRC § 1091
- 1The IRS prevents investors from gaming the system by selling a security for a loss and immediately buying it back. This is governed by the Wash Sale Rule under IRC §1091.
- 2A wash sale occurs if you sell a security at a loss and, within a 61-day period (30 days before the sale, the day of the sale, and 30 days after the sale), you:
- 3Buy the same or a 'substantially identical' security.
- 4Acquire a contract or option to buy the same or a substantially identical security.
- 5Acquire the same security in a tax-advantaged account like an IRA.
Frequently Asked Questions: IRC § 1091
What is the core rule under IRC § 1091 (Tax-Efficient Investing: Harvesting, Rebalancing, and the Wash Sale Rule)?
Under IRC § 1091 (CFP Board / IRS / SEC), tax-Efficient Investing: Harvesting, Rebalancing, and the Wash Sale Rule establishes the authoritative rules tested on the CFP® Certification. A comprehensive lesson on integrating tax-loss harvesting and portfolio rebalancing to manage capital gains. VoraPrep verifies every threshold, worked table, and practice question below against the current CFP® Certification blueprint.
How is IRC § 1091 tested on the CFP® Certification?
The IRS prevents investors from gaming the system by selling a security for a loss and immediately buying it back. This is governed by the Wash Sale Rule under IRC §1091. A wash sale occurs if you sell a security at a loss and, within a 61-day period (30 days before the sale, the day of the sale, and 30 days after the sale), you:
Where can I practice CFP® Certification questions on Tax-Efficient Investing: Harvesting, Rebalancing, and the Wash Sale Rule?
Test yourself instantly with the free playable CFP® Certification question on this page, or launch VoraPrep's full CFP® Certification adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cfp.