The intention of the investor is to repurchase the security once the new year is started, if possible, at a lower cost than what he sold at. Thus, this was sale is a method that has been considered by investors since ages to discover a tax loss without restricting the exposure to chances they anticipate in owning specific security.
A wash sale works out when the tax laws of a country allow tax deductions for losses incurred on securities held in a specific ta year. With no such incentives, there wouldn’t be any requirement of wash sales.
But wherever these incentives exist, wash sales inevitably are used. Basically, a wash sale is divided into three different parts.
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The rule signifies that in case any investor purchases security before or within 30 days of selling the same, any losses made from this sale will not be counted against the reported Income. Effectively, this eliminates any incentive to be received in a short-term wash sale.
For instance, suppose you get Rs. 20,00,000 Capital gains by selling ABC stocks. This way, you will belong to the highest tax bracket. Thus, you will either have to pay 30% tax or Rs. 187500 to the government.
However, let’s say you sold XYZ security and incurred a loss of Rs. 10,00,000. Now, your net Capital Gain for tax will be:
Rs. 20,00,000 – Rs. 10,00,000 = Rs. 10,00,000
This means that you will only have to pay 15% in the taxes. It is evident how the loss on XYZ decreased ABC's gain; thus, it reduced your tax bill. However, if you repurchase the XYZ stock or anything substantially similar, within 30 days of the sale, the outlined transaction will be considered as a wash sale.