tax swap

Tax Swap

A method of crystallizing capital losses by selling losing positions and purchasing companies within similar industries that have similar fundamentals.

Notes:

Investors can circumvent the IRS "wash sale rule" and utilize tax benefits of capital losses by selling securities that they are losing money on and buying others that have very similar characteristics. By tax swapping there is the presence of basis risk since the stock being sold and the stock being purchased are typically not identical and will react to different market factors individually.

See also: Basis Risk, Capital Loss, Crystallization, Paper Profit (or Loss), Wash Sale, Wash Sale Rule

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Tax swap

Swapping two similar bonds to receive a tax benefit.

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tax swap

The sale of a security that has declined in price since the purchase date and the simultaneous purchase of a similar, but not substantially identical, security. The purpose of the swap is to achieve a loss for tax purposes while continuing to maintain market position. See also wash sale.