Final answer:
A wash sale occurs when an investor sells a security at a loss and then buys the same or substantially identical security within 30 days before or after the sale, resulting in the disallowance of the tax loss claim. This rule aims to prevent tax deductions for losses without true economic consequence. The disallowed loss is added to the cost basis of the new shares, affecting future tax calculations.
Step-by-step explanation:
Characteristics of a Wash Sale
A wash sale occurs when an investor sells or trades a security at a loss and then repurchases the same security, or one that is substantially identical, within 30 days before or after the sale. The Internal Revenue Service (IRS) uses the wash sale rule to disallow the claim of a loss on a sale of a security if the investor makes this kind of repurchase.
The main characteristics of a wash sale include:
The sale of a security (stocks, bonds, options) at a loss.
The repurchase of the same security, or one that is substantially identical, within a 30-day window before or after the sale.
The inability to deduct the loss from the sale on your tax return for the current year due to the reacquisition.
This rule is intended to prevent investors from creating a tax deduction for a loss without actually incurring a significant economic loss. The disallowed loss from the wash sale is added to the cost basis of the newly purchased security, which may affect the amount of taxable gain or loss when the new shares are eventually sold.