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What Is the Wash Sale Rule?

In business, "wash sale" refers to a malicious practice aimed at improving one's financial gains without a real benefit to the market. This is usually performed by selling stocks, bonds or another type of security at a high loss, waiting a little while - normally not very long - and purchasing the same security back. Sometimes, the purchase may be for a different security, though it will still be very similar to the one originally sold. The result of this practice is that the losses incurred from the original sale can be used in a tax deduction claim, while the owner of the stocks hopes that the stock's value will rise to a profitable level eventually.

Wash sales are commonly committed when the company performing the act has managed to build a steady rate of income in the last fiscal period, in order to offset the losses imposed by the initial sale of their stocks. In some cases, wash sales can actually harm a company's finances, if the loss cannot be properly adjusted for, and the stock's price does not end up climbing to an acceptable level - though these cases are rather rare, and for the most part, committing wash sales is highly beneficial to those who engage in it.

The wash sale rule prevents malicious gains occurring from committing wash sales, typically by disallowing the company to claim losses on the initial sale. This effectively negates any negative consequences for the market stemming from the wash sale, and prevents the company from making any financial gains from the sale.

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