Legal Definitions - wash sale

A wash sale is when you sell an asset, like stocks or bonds, at a loss and then buy similar assets within a short period of time. People do this to try and get a tax deduction for the loss. However, the IRS has made it so that these losses are usually not deductible.

Let's say you bought 100 shares of XYZ stock for $10 each. The stock price drops and you sell those shares for $8 each, resulting in a loss of $200. If you buy 100 shares of XYZ stock again within 30 days, that's considered a wash sale. You can't deduct the $200 loss on your taxes.

Another example is if you sell a bond at a loss and then buy a similar bond within 30 days. That's also a wash sale.

These examples show how people try to take advantage of tax deductions by selling assets at a loss and then buying them back quickly. However, the IRS has rules in place to prevent this from happening too often.