What It Is:
A wash occurs when two actions cancel each other out (such as a gain and an equal loss), effectively creating a break-even situation.
How It Works/Example:
Let's assume XYZ Company sells $1,000 worth of products. If these products cost XYZ Company $1,000 to manufacture, the transaction is considered a wash. Likewise, if an investor makes a $1,000 profit on an investment but loses $1,000 on another investment during the same time, the result is considered a wash.
Why It Matters:
Obviously, profit motivates most companies to minimize wash transactions. However, wash transactions may have tax benefits, most of which are illegal. Investors should be aware of specific tax rules and prohibitions regarding wash transactions (see Wash Sale).