Generally, a wash sale has three parts.
- An investor notices they are in a losing position, so they close it by selling the stock or exiting a trading position.
- The sale allows them to take a loss that they can legally claim on their tax returns as a reduction of their earnings for that year, which reduces their total tax liability.
- The investor will look to purchase the security at or below the price at which they sold it—if the purchase occurred 30 days before or after the sale, it is considered a wash sale, and the loss cannot be claimed.
