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.

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RELATED FAQS
  1. How are capital gains calculated when using an online brokerage account?

    Are capital gains calculated annually or on every trade? How can selling a stock at a loss save me money on taxes? Also, ... Read Answer >>
  2. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
  3. What cost basis reporting rules are set by the Internal Revenue Service (IRS)?

    Read about the cost basis reporting regulations imposed by the Internal Revenue Service and some options available to individual ... Read Answer >>
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