Tax Swap

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DEFINITION of 'Tax Swap'

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

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  2. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer ...
  3. Paper Profit (Paper Loss)

    Unrealized capital gain (or capital loss) in an investment. It ...
  4. Crystallization

    The act of selling and buying stocks almost instantaneously in ...
  5. Basis Risk

    The risk that offsetting investments in a hedging strategy will ...
  6. Wash Sale

    A transaction where an investor sells a losing security to claim ...
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