DEFINITION of 'Bond Washing'
The practice of selling a bond just before it pays a coupon payment and then buying it back once the coupon has been paid. Bond washing results in a tax-free capital gains because after the coupon has been paid, the bond will sell for less.
BREAKING DOWN 'Bond Washing'
Bond washing is a method of tax avoidance. In this manner the bond holder avoids paying taxes on the bond coupon income. Because bond washing is a form of tax evasion, whereby buyers and sellers may collude to benefit from tax avoidance, it has been banned, though the practice still exists.