Wash Sale Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Wash Sale, written in plain English, along with examples of how it is used.
What is Wash Sale?
“A security’s purchase and sale either within a short period of time (typically thirty days) or simultaneously. If a wash sale occurs, the taxpayer cannot deduct any capital losses on the sale. Instead, the loss is added to the basis of similar securities that were recently purchased.
History and Meaning of Wash Sale
A "Wash Sale" is a term used in finance and taxation to describe a sale of securities that ultimately result in no gain or loss for the seller. It occurs when an investor sells a stock or other security at a loss and then purchases it again within 30 days of the sale. The aim of the wash sale is to establish an artificial loss that can be used to offset capital gains, thereby reducing the seller's tax liability. However, the IRS does not permit losses from wash sales to be claimed as a deduction.
The term supposedly comes from the practice of traders in the 19th century washing or cleaning a stock of its loss by selling it on December 31st and repurchasing it the very next day, January 1st of the following year. It gained widespread acceptance after the US tax code was overhauled in 1921.
Examples of Wash Sale
- If a taxpayer sells shares of a mutual fund for a loss and then purchases additional shares of the same fund within 30 days before or after the sale date, the purchase would trigger a wash sale.
- If an investor sells shares in XYZ company at a loss and then purchases shares in a very similar company, such as ABC company, within the 30-day period, they could be considered to have engaged in a wash sale.
- If an investor sells shares in a stock and, within 30 days, buys call options that give them the right to purchase the same stock at a fixed price, the call options would also be considered a wash sale.
Legal Terms Similar to Wash Sale
- Capital Gain: The profit made on the sale of a security or investment property.
- Capital Loss: The loss incurred on the sale of a security or investment property.
- Tax Loss Harvesting: A technique used to reduce taxes by selling securities that have experienced a loss to offset gains elsewhere in a portfolio.