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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Wash Rule

Definition:

After you go to the bathroom you really should do this. With soap. It also refers to the notion that you cannot sell a stock and buy it back within 30 days and then claim it as a loss with the IRS.

Example

You bought Netflix at $400 a share in October. It cratered on a weaker-than-expected Christmas. It's now December 27th and you want to sell it here at $320 and take the $80 a share loss to make up for your gains that you realized by selling GOOG and YHOO at a tidy profit. It's smart tax planning so you sell. 

New Year's Eve happens and you get anxious that Netflix is going to skyrocket in the next week. So you buy the same amount you sold January 15th. Bad news for you. You don't get to deduct the $80 a share loss you realized December 27th because you effectively "washed" that sale. Like it didn't happen. Like the soda that never, uh, really spilled on your aunt's carpet.

Clever replacing is what the wash rule is trying to avoid. For a sale to be recognized by the IRS as a clean qualified sale, 30 days have to pass from when you sold it to when you bought it back—so if you wait until Jan 26th (31 days in December) to buy back Netflix, then you're good to go. If it skyrocketed before then, well, too bad. 

Next time, try Hulu.

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