Tax Swap

DEFINITION of 'Tax Swap'

A method of crystallizing capital losses by selling losing positions and purchasing companies within similar industries that have similar fundamentals.

BREAKING DOWN 'Tax Swap'

Investors can circumvent the IRS "wash sale rule" and utilize tax benefits of capital losses by selling securities that they are losing money on and buying others that have very similar characteristics. By tax swapping there is the presence of basis risk since the stock being sold and the stock being purchased are typically not identical and will react to different market factors individually.