What is a 'wash sale'?

A 'wash sale' refers specifically to a transaction in which an investor sells a security at a loss and then repurchases the same or substantially identical security within a 30-day period. This concept is significant for tax purposes because the IRS disallows the loss from such a transaction for tax deduction purposes. Essentially, if the investor sells a security and then quickly buys it back, they are not recognized to have truly exited their investment position. Therefore, the loss cannot be recorded for tax benefits, as the investor has not realized an actual economic loss; they still hold the same investment. This rule aims to prevent taxpayers from taking a tax deduction for a loss while maintaining their investment in the same asset. The definition and implications of a wash sale are important for investors to understand in order to comply with tax regulations.