A false sale occurs when an investor closes a position at a loss and buys the same security (or a substantially similar one) within the 61-day dummy sale period.
This also happens if their spouse or a company they control buys a substantially similar security during that period.
The IRS views this activity as creating artificial losses for tax credits.
The fictitious sale rule prevents taxpayers from deducting unjustified capital losses from taxable profits.
Investors need to understand the wash-and-sell rule so they can take steps to avoid it.