Tax Swap

A tax swap is a method of realizing a capital loss that a taxpayer can subsequently claim as a deduction to taxable income. Businesses and individual investors may both use the tax swap strategy. The first half of a tax swap requires the sale of a losing stock investment. The second phase of a tax swap entails the purchase of a higher-priced stock in a similar company in the same or similar industry. Investors also avoid the IRS wash sale rule with this approach to a tax swap, while at the same time keeping their money invested. A possible drawback of a tax swap is that even if the asset purchased is similar to the asset sold, it is not identical and will not perform precisely the same way. Moreover, by shuffling money from one stock to another, a tax swap risks even larger loses than an investor might have intended if the originally owned stock rallies dramatically and/or the new stock falls.