Definition of 'Wash Sale'
A wash sale is a sale of a security (stock, bonds, options) at a loss and then the buy back of the same or similar stock soon afterwards (Internal Revenue Code Sec. 1091). The idea is to make an unrealised loss claimable as a tax deduction, by offsetting against other capital gains in the current or future tax years. The security is repurchased in the hope that it will regain its previous losses.
In some tax codes, such as the USA and the UK, tax rules have been introduced to disallow the practice, for example, if the stock is bought within 30 days of its sale. The disallowed loss is added to the basis of the newly acquired security. Tax authorities may consider the practice illegal even in the absence of explicit regulations, on the grounds that the transaction is not genuine, but intended only to reduce tax liability. This also happens in Australia.
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