What is a wash sale?
A wash sale is carried out by investors to try to claim extra tax benefits. They do this by rebuying a stock they’ve just sold or buying a stock and selling it straight away to claim a loss on the sale.
Where have you heard about wash sales?
A wash sale is similar to a practice in the UK known as bed and breakfasting. A position is sold on the last trading day of the year to establish a tax loss, then rebought in the first session of the new trading year.
What you need to know about wash sales.
As you might imagine, this practice is illegal. The 30-day wash rule forbids taxpayers from deducting losses on the sale of a stock if they buy the same security 30 days before or after the sale. So in total the window actually lasts for 61 days. In the UK, similar tax rules have been introduced to ban bed and breakfasting.
A wash sale is not the same as a wash trade, which is when brokers trade too frequently to give the impression that a share is more liquid than it really is.