Next video:
Loading the player...

The wash sale rule is a provision of the Internal Revenue Code that prohibits taxpayers from creating artificial losses by selling stocks and bonds at a loss, only to repurchase them shortly after.

Under the rule, the IRS examines the taxpayer’s transactions 30 days before the sale and 30 days after the sale -- to check for purchases of a substantially similar security. 

The benefit of a wash sale is the creation of capital loss that may be deductible for tax purposes.  For instance, if the taxpayer has capital gains from other stock sales, he may sell some stocks at a loss to offset those gains, and thus lower his taxes. 

Mike has $10,000 in capital gains for the year.  Mike also owns 500 shares of Buscemi Company with a tax basis of $35, however Buscemi stock now only sells for $15 a share.  Mike wants to reduce his taxes, so he sells the Buscemi stock at $15, giving him a $10,000 loss ($20 loss per share x 500 shares).  If he buys the shares back within 30 days at a price of $17 per share, his $10,000 capital loss will be disallowed.  

Related Articles
  1. Financial Advisor

    How to Avoid Violating Wash Sale Rules When Realizing Tax Losses

    How to avoid violating the IRS wash sale rules when realizing capital losses in your taxable investment account.
  2. Taxes

    How Taxpayers Can Do A Legal Wash Sale

    The wash sale rule can result in the disallowance of a much-needed deduction. Here you can learn what constitutes a wash sale and how to avoid it.
  3. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  4. Retirement

    Can IRA Transactions Trigger The Wash-Sale Rule?

    In 2008, the IRS said: Yes, they can. Find out what this means and how to avoid penalties.
  5. Financial Advisor

    Here's the Best Way to Skirt Capital Gains Taxes

    Taxpayers who know the rules for netting gains/losses can generate additional losses to net against the taxable gains in their portfolios. Here's how.
  6. Managing Wealth

    Capital Losses and Tax

    When an investment sells for less than its purchase price, the difference is a capital loss.
  7. Investing

    Explaining RBC's Wash Trade Accusations

    On April 2, U.S. regulators accused RBC of operating a wash trading scheme. Find out what this means.
  8. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  9. Taxes

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
  10. Tech

    Using Tax-Loss Harvesting to Keep Your Gains

    Harvesting tax losses is a key skill that investors can use to keep more of their money in their pockets the next time they file taxes.
Hot Definitions
  1. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  2. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  3. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  4. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  5. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
  6. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, ...
Trading Center