Is wash trading illegal?
The goal of wash trading is to influence pricing or trading activity, often through collaboration between investors and brokers. Wash trading is illegal and can result in penalties, including the disallowance of tax deductions for losses.
Wash trading can happen in any market and is illegal in most, but cryptocurrency exchanges are particularly attractive to rogue investors. The U.S. National Bureau of Economic Research estimates that wash trading accounts for 70% of trades on unregulated exchanges.
Look for assets with high trading volumes and solid fundamentals, and be wary of assets that seem too good to be true. It is also important to keep an eye out for red flags that may indicate wash trading, such as abnormal trading volumes, abnormal price movements, and suspicious trading patterns.
Wash trading is a form of market manipulation in which an entity simultaneously sells and buys the same financial instruments, creating a false impression of market activity without incurring market risk or changing the entity's market position. Wash trading has been deemed illegal in most jurisdictions.
Intentional wash trades are illegal self-matches that can manipulate markets by giving the impression of legitimate trading interest or activity at a certain price, time, and size. FIA PTG supports efforts to prohibit this activity.
The IRS will disallow your loss, and you won't be able to claim a write-off on your tax return. You'll end up owing taxes on any income that you tried to offset with your wash sale. If you're not current on your taxes, you can incur typical penalties for non-payment, including fines.
The Bottom Line
To avoid triggering the wash sale rule, an investor can employ a strategy such as buying more of the stock that they'd like to sell, holding on to the new stock purchase for 31 days, and then selling it.
Remember Wash trading is not legal, as it is performed to manipulate the market and encourage other investors to move into a buying position. Spoofing is when a trader makes a deceptive bid or offer with the intent of canceling it before execution.
Traders often trade the same stocks for days or weeks at a time, not knowing they are actually placing wash sales that are not tax deductible (in the case of losses). If you are an active trader, make sure to consult with a good CPA to learn more about the wash sale rule and how it may impact your trading taxes.
How to avoid a wash sale. One way to avoid a wash sale on an individual stock, while still maintaining your exposure to the industry of the stock you sold at a loss, would be to consider substituting a mutual fund or an exchange-traded fund (ETF) that targets the same industry.
What is the penalty for a wash sale?
While not illegal, wash sales have negative tax implications: losses from such sales cannot be used to offset gains in the same tax year. However, these losses can be added to the cost basis of the newly purchased security, affecting future gains.
To avoid a wash sale, you could replace it with a different ETF (or several different ETFs) with similar but not identical assets, such as one tracking the Russell 1000® Index.
Example of a Wash Trade
Let's say, for example, that an investor owns 50 shares of Company ABC and sells the shares on January 1 at a loss of $2,000. The investor then buys 50 shares in the same company on January 22 and subsequently realizes a gain of $4,000. A wash trade hasn't technically occurred yet.
In the financial space, the term “spoofing” refers to an illegal form of stock market and exchange trickery that is often used to change asset prices.
The main difference between day trading and gambling is that gamblers play available odds while traders strategize based on market trends, price movements, and past performances. Traders often use sophisticated analytical tools and real-time market updates to decide which stocks to buy or sell and how much to spend.
Retail investors can buy and sell stock on the same day—as long as they don't break FINRA's PDT rule, adopted to discourage excessive trading.
The Wash-Sale period is defined as 30 days before and 30 days after the sale date, totaling 61 days (including the sale date).
What Is the Wash Sale Rule? The wash sale rule prohibits an investor from taking a tax deduction if they sell an investment at a loss and repurchase the same investment, or a substantially identical one, within 30 days before or after the sale.
"Billionaire CEOs like [Jeff] Bezos, [Mark] Zuckerberg, Jamie Dimon, and the Walton family are selling off massive amounts of their own stocks, and analysts think the CEOS may be bracing for an economic downturn," he said, adding, “An overheated stock market continues to climb to new heights as investors feed that ...
Your loss is a "wash" in this scenario, just as though you had held your original shares without selling. The tax benefit of your capital loss isn't gone forever, but it's deferred.
What is spoofing illegal?
When is spoofing illegal? Under the Truth in Caller ID Act, FCC rules prohibit anyone from transmitting misleading or inaccurate caller ID information with the intent to defraud, cause harm or wrongly obtain anything of value. Anyone who is illegally spoofing can face penalties of up to $10,000 for each violation.
Some brokers will track wash sales that have occurred if you buy and sell the same stock at their brokerage. However, because the brokers do not share your information, there is no way to know whether your loss reported on their 1099B is or isn't washed out by a purchase at some other broker.
Interactive Brokers includes wash sales on daily, monthly and annual Activity Statements for all 1099-eligible accounts, as required by the IRS. Our wash sales are calculated on a granular basis, in other words as the shares actually trade through the system.
A day trade is when you purchase or short a security and then sell or cover the same security in the same day. Essentially, if you have a $5,000 account, you can only make three-day trades in any rolling five-day period. Once your account value is above $25,000, the restriction no longer applies to you.
Under the wash-sale rule, you cannot deduct a loss if you have both a gain and a loss in the same security within a 61-day period. (That's calendar days, not trading days, so weekends and holidays count.) However, you can add the disallowed loss to the basis of your security.
