When an investor buys substantially identical securities as those he sold within the last or next 30 days, the sale of these securities cannot be used as a realized loss for income tax purposes. For example, you sell your 100 AAA shares on October 1 for a loss of $1000. Then you buy 100 new shares of AAA on October 10. You sell these new shares on December 12 for a $2000 realized gain. On your tax return, you must show a net realized gain of $2000. The wash sale ($1000 loss) is disallowed as an offset against the gain for income tax purposes.
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