Legal Definitions - wash transaction

A wash transaction refers to a transaction, particularly in financial markets, where an asset is sold and then repurchased, or simultaneously bought and sold, by the same party or by parties acting in concert, without a genuine change in beneficial ownership or market risk. The primary purpose of such a transaction is often to create a misleading appearance of trading activity, manipulate prices, or improperly claim a tax benefit, rather than to achieve a true economic exchange. In the context of securities, it is frequently referred to as a "wash sale."

Here are some examples illustrating wash transactions:

• Tax Avoidance in Securities: An investor, Maria, owns 500 shares of "GreenTech Inc." stock that have significantly decreased in value. On December 20th, she sells all 500 shares at a loss, hoping to claim a capital loss deduction on her taxes. However, on January 5th of the following year, she repurchases 500 shares of "GreenTech Inc." stock. Because she bought back substantially identical shares within 30 days before or after the sale, this is considered a wash transaction (specifically, a wash sale) by tax authorities. The Internal Revenue Service (IRS) would disallow the capital loss deduction because there was no true economic change in her investment position; she merely sold and immediately reacquired the same asset, primarily to generate a tax benefit without altering her market exposure.

• Market Manipulation in Commodities: Two traders, operating under the direction of the same large investment firm, agree to simultaneously place orders for a substantial volume of wheat futures contracts. Trader A places an order to sell 10,000 contracts at a specific price, and at the exact same moment, Trader B places an order to buy 10,000 contracts at that identical price. This creates the illusion of significant trading activity and demand for wheat futures, potentially influencing other market participants to believe the price is genuinely moving or that there's high liquidity. Since the beneficial ownership and market risk of the contracts effectively remained within the control of the same investment firm, this constitutes a wash transaction designed to manipulate the market rather than facilitate a genuine exchange between independent parties.

• Inflating Asset Value in Real Estate: A property development company, "Urban Sprawl Developers," owns a commercial building that is struggling to attract tenants. To make the building appear more valuable and secure a larger loan from a bank, Urban Sprawl Developers "sells" the building to a shell company it fully controls, "Cityscape Holdings," at an inflated price. Immediately afterward, Cityscape Holdings "sells" the building back to Urban Sprawl Developers, again at the same inflated price. No actual money changes hands between independent parties, and the beneficial ownership of the building never truly leaves the control of the developer. This series of transactions is a wash transaction, creating a false impression of the property's market value without any real change in ownership or risk, potentially to defraud lenders or future investors.