The term wash sale refers to a transaction in which a person sells or trades a security at a loss and then re-purchases the same stock or security, or obtains a contract or option to do so, within 30 days before or after the date when the loss-generating investment was sold. This window of time account as a total of 61-day wait period. Another scenario that leads to a wash sale is when a person sells a security and then, during the 61-day waiting period, their spouse or a business they control purchases a substantially identical investment. Under Internal Revenue Service (IRS) regulations, a tax deduction for a loss on a securities sold in a wash sale is not allowed. This provision is known as the wash-sale rule. The rule is intended to discourage investors from making an investment loss in order to claim a tax deduction while effectively keeping their stake in the securities.
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