Substantially Identical Security

AAA

DEFINITION of 'Substantially Identical Security'

A security that is so similar to another that the Internal Revenue Service (IRS) does not recognize a difference between the two. Substantially identical securities can include both new and old securities issued by a corporation that has undergone reorganization. Convertible securities and common stock of the same corporation can also fall into this category if the market and conversion prices are similar.

INVESTOPEDIA EXPLAINS 'Substantially Identical Security'

Substantially identical securities cannot be used in tax swaps to create capital losses. Securities used in swaps must be similar but not substantially identical; if they are, the IRS will consider the transaction to be a wash sale, and will disallow it.

RELATED TERMS
  1. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  2. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  3. Tax Swap

    A method of crystallizing capital losses by selling losing positions ...
  4. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  5. ISDA Master Agreement

    A standard agreement used in over-the-counter derivatives transactions.
  6. Circus Swap

    A combination of an interest rate swap and a currency swap in ...
Related Articles
  1. Active Trading Fundamentals

    The Art Of Cutting Your Losses

    Taking corrective action before your losses worsen is always a good strategy. Find out how to keep your capital losses small and let your winners run.
  2. Retirement

    To Sell Or Not To Sell

    Learn some tips on how to exit a position to the best of your advantage.
  3. Taxes

    Avoid Tricky Tax Issues On Municipal Bonds

    Learn the rules every investor should know before buying into this "tax-free" investment.
  4. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  5. Investing Basics

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  6. Investing Basics

    ISDA Master Agreement

    The ISDA Master Agreement is a document outlining the terms of an over-the-counter derivatives transaction between two parties. This document serves as a standard agreement in these transactions ...
  7. Insurance

    Credit Default Swaps: What Happens In A Credit Event?

    The credit crisis of 2008 prompted important changes to the settlement of credit default swaps.
  8. Fundamental Analysis

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  9. Investing Basics

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  10. Bonds & Fixed Income

    A Guide To Real Estate Derivatives

    These instruments provide exposure to the real estate market without having to buy and sell property.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center