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.