Wash Sales Meaning

Wash sales is the term used in the context of taxation, this type of transaction is done when an investor who is sitting on losses on his or her investments sells his or her investment at a loss so that he or she can claim that loss while calculating income tax and hence save some taxes. In wash sales transactions investors repurchase the investment after some time and hence in a way there is no change in the portfolio of investor and he or she has saved taxes due to doing wash sales transaction.

It can be better understood with the help of an example suppose you own 500 Microsoft shares at average price of $200 and suppose after 1 year the price has dropped to $180. Since as an investor you are sitting at loss of $10000, now if you sell those shares today you will be able to claim $10000 loss in your income tax calculation and after some time if the price of stock is still $180 or below you can buy it again and this process of selling to repurchase again after claiming tax benefit is called wash sales transaction.

However conducting wash sales transaction is not as simple as it looks because the whole idea of claiming tax benefit will go out of the window if investor repurchases the sold investment within 30 days because if investor do so it will not be considered as tax- deductible transaction by income tax authorities. Another limitation of conducting was sales transaction is that there is no guarantee that stock you sold will be available at lower or same rate after 30 days, so in the above example if the price of Microsoft shares after 30 days rise above $180 than this whole process of doing was sales transaction is futile as it will lead to loss for the investor.

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