A wash sale occurs when a trader sells or trades securities at a loss, and within 30 days before or after the sale the trader carries out any of the following trades: 1) purchasing almost identical or identical securities, 2) acquiring almost identical or identical securities, as part of a fully taxable trade, and 3) acquiring a contract or option to purchase (take a long position in) almost identical or identical securities.

Wash sales are prohibited under regulations, and a market player is not allowed to deduct losses arising from wash sales. These sales or trades are illegal transactions which involve the sale of a security such as stock, bonds, or options, at a loss and the repurchase of the same security or an identical one within a short period of time (30 days), in the hope that it will get back to its previous level. This strategy is used by investors and traders in a bid to claim additional tax benefits.