What is "wash sale"

Wash sale \Wash sale\ (Stock Exchange) A sale made in washing. See Washing, n., 3, above.

A wash sale (not to be confused with a wash trade) is a sale of a security ( stock, bonds, options) at a loss and repurchase of the same or substantially identical security shortly before or after. The regulations around wash sales are to protect against an investor who holds an unrealized loss and wishes to make it claimable as a tax deduction within the current tax year. The security is then repurchased in the hope that it will recover its previous value, which would only become taxable in some future tax year. A wash sale can take place at any time during the year. In the UK, a similar practice which specifically takes place at the end of a calendar year is known as bed and breakfasting. In a bed-and-breakfasting transaction, a position is sold on the last trading day of the year (typically late in the trading session) to establish a tax loss. The same position is then repurchased early on the first session of the new trading year, to restore the position (albeit at a lower cost basis). The term, therefore, derives its name from the late sale and early morning repurchase.

In some tax codes, such as the USA and the UK, tax rules have been introduced to disallow the practice (e.g. if the stock is repurchased within 30 days of its sale). The disallowed loss is added to the basis of the newly acquired security.