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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.  

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