What is wash sale rule is for?

If day traders pay by simply pay tax on (net capital gain for all trades in 2009 - net capital loss for all trades in 2009 ) at the end of the year, what is wash sale rule is for ? what good does it do to taxes?


PLease be specific on the question rather than explaining definition of wash sale rule, thank you.What is wash sale rule is for?
MSC and Shoredude are pretty much right on the money, the rule is in place to prevent people from placing a trade simply because they want to take advantage of the tax benefit, and its most clearly evident when on December 31 a person realizes they need to offset a gain somewhere else and sells a stock and/or a mutual fund for that matter at a loss simply so they can write off the loss on their taxes. Once you sell at a loss, you have to wait 30 days before you can repurchase the stock to avoid the perception of selling just for the tax benefit. Long story short its the way the IRS prevents investors from selling a stock with the only intention of writing off the loss and thus manipulating the market.What is wash sale rule is for?
JK sort of has it backwards. It is so if you sell something at a loss and buy it cheaper within 30 days, you cannot take the loss on taxes until you sell that 2nd position at a loss (without buying it back within 30 days. For example if you buy at 30, sell at 20 and buy at 15 within 30 days, the $10 loss gets added to the cost basis of your latest trade making its cost basis $25. If you then sell that at 20, you can take your $5 loss. If you sell at 30 you would end up with $5 gain.





It can also affect a short position. If you sell stock you do not own and the trade goes against you, you close that out and go long, the loss on the short could be delayed until you sell the long.
Say you purchase a stock for $20 and hold on to it for a few months. The price goes up to $40 and you sell it....making a profit of $20. Days later (within 30 days) you purchase the stock again for $30 and again within a few months sell it for $10 because you feel that it will go lower and you don't want to take a loss, you are not able to write off the loss on your tax returns.





In short, if you purchase and sell the same stock within 30 days, the capital loss and/or gains are considered a wash and can't claim it on your returns.
The purpose is to prevent people from selling their losing positions on Dec 31, and then buying them back on Jan 1 just to reduce their tax bill.





If you're a day trader, and you use mark-to-market accounting for your taxes, then it probably doesn't affect you.
It is designed so people can't sell a stock when it is down and take a capital loss, then rebuy the stock later the same day.