What does 'Wash Trading' mean

Wash trading refers to buying shares through one broker and selling the shares through another broker. Wash trading is not legal, as it is performed to manipulate the market and encourage other investors to move into a buying position. A quick turnaround of positions is not considered wash trading, provided the transaction creates market risk for the trader and alters his market position.

BREAKING DOWN 'Wash Trading'

Also known as round trip trading, the act of wash trading allows traders to buy stocks and then sell them, giving the appearance of purchases and sales being made, but the trader does not incur any market risk or change in market position.

The Commodity Exchange Act

The Commodity Exchange Act (CEA) establishes regulations for the trading of commodity futures in the United States. Under the CEA, wash trading is illegal. The CEA was passed in 1936 and has been amended a number of times since its establishment. It replaced the Grain Futures Act of 1922. This Act provides the statutory framework under which the Commodity Futures Trading Commission (CFTC) operates. The CFTC was created in 1974 as a result of the CEA.

Wash Sale

A wash sale is completely separate from wash trading. A wash sale is the sale of a security, such as stocks or bonds, at a loss. The same, or nearly the same, security is then repurchased quickly, within 30 days, either before or after the sale. Wash sales are used as collateral for margin debt; they must be approved by the Federal Reserve Bank. In addition to a trader buying back the same security within the 30-day period, a wash sale is also approved if the trader acquires an identical security in a taxable trade or acquires an option or contract to buy the same security that was sold.

Regulations surrounding wash sales are designed to protect an investor who carries an underlying loss and then wants to claim it as a tax deduction in the current tax year. The security is repurchased with the intention of recovering its previous value, with taxation happening in a future year. In certain tax codes within the United States, tax regulations are in place to prevent the practice of wash sales. Under wash sale rules, the disallowed loss is added to the basis of the repurchased security, the loss on the sale cannot be claimed on taxes and the holding period on the repurchased stock is inclusive of the holding period on the stock that was sold.

  1. Wash

    A series of transactions that results in a zero net sum gain. ...
  2. Wash-Sale Rule

    A regulation that prohibits a taxpayer from claiming a loss on ...
  3. Commodity Exchange Act - CEA

    An act passed in 1936 by the U.S. Government that provides federal ...
  4. Capital Loss

    A capital loss is the loss incurred when a capital asset that ...
  5. Capital Loss Carryover

    The net amount of capital losses that aren't deductible for the ...
  6. Lifetime Cost

    A total of all other costs relating to a good over its expected ...
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. 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.
  3. Investing

    Washing Trades in a Canadian Registered Account

    For Canadian RRSP accounts, washing same-day trades saves investors the exchange fee.
  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. Insights

    TD Ameritrade Provides Year-End Tax Strategies for Traders and Investors

    TD Ameritrade highlighted three tax landmines that traders and investors may not be aware of.
  6. Taxes

    There's Still Time for Tax Planning in 2016

    Here’s a look at some considerations for year-end planning for taxable (non-retirement) accounts.
  7. Taxes

    'Tis The Season For Tax-Loss Harvesting

    With the end of the year upon investors are looking for ways to reduce their tax bill. One tactic that is often used is tax-loss harvesting.
  8. Taxes

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
  9. Financial Advisor

    Top Tax Planning Tips for Volatile Markets

    Volatile markets provide several ways to lower tax bills ... if you play your cards right.
  1. Is there a situation in which wash trading is legal?

    Learn about what wash trading is and how it can affect the value of a stock. Explore the difference between wash trading ... Read Answer >>
  2. What is the difference between wash trading and insider trading?

    Explore the differences between two trading practices, wash trading and insider trading, and find out why these practices ... 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 >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center