A Wash Sale Involves Selling and Buying the Same Stock

But your tax agency may take you to the cleaners!

A wash sale is an illegal transaction an investor makes by simultaneously buying and selling a stock through two different brokers, thereby creating the illusion of activity.

Investors do this to try to create a tax loss without actually changing their position.

The effectiveness of this strategy has been greatly diminished in the U.S. with the implementation of the 30-day wash rule, where a taxpayer cannot recognize a loss on an investment if that investment was purchased within 30 days of sale.

More generally, a wash is a situation in which two events or actions effectively nullify each other.

In terms of stock investment, this could be when the gains in a portfolio equal the losses. It is another way of saying that you've broken even.

Crystallization is said to occur when an investor needs to take a capital loss for a particular stock, but still believes the stock will rise. So s/he would crystallize the paper loss by selling the stock and buying it back straight away.

Most tax agencies have regulations, such as the wash-sale rule, to prevent taking a capital loss in this fashion.

Only those arrangements that create a loss are potentially called wash sales, and hence may be subject to anti-avoidance rules that would strip away all tax benefits of a transaction.

However, if there are 'demonstrable non-tax advantages' then the dominant purpose of a transaction may not be the loss created by the tax benefit.

On the other hand, taking a loss on a stock transaction before the end of the tax year in order to clean up a portfolio and reduce capital gains on other stock sales during the financial year is a common practice.

To Conclude

Anyone looking for certainty about tax matters relating to stock sales should consider obtaining a private binding on tax aspects of any questionable transaction before proceeding.

I do not engage in practices that may be deemed by a tax agency to be illegal.

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