A wash, also known as a wash sale, is an investment-based principle that is applicable to both tax planning and investing. Wash transactions, in essence, are transactions in which an investor sells a security for a loss and then buys that same security back within a certain timeframe in order to recoup their losses.

For accounting and tax-planning purposes, the wash transaction rules dictate that any loss from a sale of a security is only deductible if the same security is not re-purchased within a 30-day period from the date of disposition. If the same security is indeed re-purchased within this period, investors are not permitted to deduct the losses of the wash transaction, although the actual position will still be considered a wash sale.

Investors who engage in wash transactions can still benefit from them, as the money they get back from their original transaction’s losses can be considered a long-term capital gain when they eventually sell the security. In addition, losses from a wash sale can be carried over and deducted from taxes in future years.

This type of transaction is most often seen with stocks and mutual funds, although any security that is able to be sold and repurchased could qualify. It is important to note that irrational wash transactions due to rumors or other forms of inaccurate information can lead to the investor suffering economic losses.

The most important takeaway from the concept of wash sales and wash transactions is that it’s important for investors to do their due diligence prior to engaging in a wash sale. By accurately understanding the concept and the associated risks, investors can effectively use wash transactions to their benefit and remain within the boundaries set by the system.