Wash Sale Law and Legal Definition
A wash sale is stock used to provide collateral for margin debt and must be approved by the Federal Reserve and an investor's broker for such use. A wash sale occurs when an investor sells or trades stock or securities at a loss and within 30 days before or after the sale the investor:
- Buys substantially identical stock or securities,
- Acquires substantially identical stock or securities in a fully taxable trade, or
- Acquires a contract or option to buy substantially identical stock or securities.
A wash sale can also occur when an investor sells stock and thieir spouse or a corporation controlled by the investor buys substantially identical stock. The IRS prohibits an investor from claiming a capital loss for tax purposes if the investment in which the loss originated is repurchased within thirty days.