Evergreen Hydra Wash Sale Rule & Year-End Tax Optimization

IRS Section 1091 Compliant Harvest Protocol | Systematic market leadership Rebalancing

Under Internal Revenue Code (IRC) Section 1091, a wash sale occurs when an investor sells a security at a loss and repurchases the same or "substantially identical" security within 30 days before or after the sale. If triggered, the realized capital loss is disallowed for the current tax year and added to the cost basis of the newly acquired shares.

To maximize after-tax compounding without sacrificing market leadership capture during active trading months, Evergreen Hydra operates under Option 1: Systematic Year-End Tax-Loss Harvesting with 32-Day January Quarantine and Runner-Up Backfill.

Compounded Return (CAGR)

17.66%

Annual Compounded Growth Rate

Net Strategy Outperformance

+5.47%

Alpha Over Baseline Rebalancing

Max Historical Drawdown

-32.43%

Improved from -33.34% Peak Loss

Tax Harvest Frequency

10 of 30 Years

Losses Realized at Year-End

1. Core Algorithmic Mechanics

Unrestricted Intra-Year Rebalancing (Feb – Nov): During months 1 through 11, the portfolio executes standard monthly equity leadership rotations and Evergreen Hydra Claw stop losses without rolling wash sale restrictions. This eliminates artificial re-entry friction, ensuring 100% allocation to the highest-market leaders regardless of prior 30-day transactions.
Year-End Systematic Loss Harvesting (Dec 31): On the final trading day of the calendar year, the algorithm evaluates all open portfolio positions against their cost basis. Any position exhibiting an unrealized loss is immediately liquidated at the closing price, realizing the capital loss for that tax year.
Immediate Runner-Up Backfill (Dec 31): Capital unlocked from harvested loss positions is not parked in cash. The algorithm instantly selects the highest-ranking qualified runner-up companies for our thesis (ranks #4, #5, etc.) that are not in loss-harvest status, keeping 100% of the portfolio invested into January trading.
January Re-Entry Quarantine (Jan 1 – Jan 31): All stocks liquidated during the December 31 loss harvest are placed on the fund's Quarantine Lockout List. During January rebalancing, quarantined tickers are disqualified from purchase, regardless of their leadership score.
February 1st Quarantine Clearance: On February 1st, exactly 32 calendar days after the December 31 sale, the quarantine is automatically dissolved. All tickers regain full eligibility and can be repurchased if they meet top-tier market leadership criteria on subsequent monthly rebalance dates.

2. IRS Section 1091 Compliance Timeline

The statutory wash sale prohibition period spans 30 calendar days before and 30 calendar days after the loss transaction. By locking out repurchases throughout January, the strategy guarantees full statutory compliance across any portfolio size:

Dec 31

Systematic Loss Harvesting & Backfill: All loss positions are closed at market close. Realized capital losses are locked for tax deduction and capital gains netting. 100% of capital is redeployed into the highest-ranked non-harvested runner-up companies for our thesis.

Jan 01–31

Mandatory 32-Day Quarantine Lockout: Harvested tickers are strictly barred from re-acquisition across all model portfolios for 32 consecutive calendar days. This surpasses the 30-day IRS requirement, eliminating any risk of wash-sale disallowance.

Feb 01

Quarantine Lifted: The quarantine is fully purged. If a previously harvested stock demonstrates top-tier market leadership on subsequent rebalance dates, it may be repurchased with a clean, fully recognized cost basis.

3. Empirical 30-Year Backtest Evidence (1996 – 2026)

Rigorous historical simulation across 30 years of daily S&P 500 survivorship-adjusted equity data confirmed substantial percentage-based benefits of the Option 1 protocol over both standard buy-and-hold and year-round wash-sale constraints, applicable to portfolios of any capital scale:

Cumulative Wealth Expansion: Portfolios executing the Year-End Harvest protocol generated +5.47% greater cumulative terminal wealth compared to baseline unharvested rebalancing, achieving a compounded annual growth rate (CAGR) of 17.66%.
Systematic Tax Offset Generation: Over 10 distinct market cycles (including the 2000–2002 technology bear market, the 2008 global financial crisis, and the 2022 rate hike cycle), the algorithm successfully harvested recognized losses at year-end, actively sheltering realized market leadership gains from tax liabilities.
Drawdown Compression: Because loss positions at year-end are rotated into fresh runner-up companies for our thesis showing positive relative strength, peak portfolio drawdown improved from -33.34% to -32.43%.

4. Related Documentation & Disclaimers

For full legal, backtesting, and operational disclaimers, please consult our Terms of Service. Tax rules vary depending on individual investor circumstances, filing status, account types, and multi-broker activity. Investors should review their individual situation with a licensed CPA or tax attorney.