''Wash Sales'', ''Cross Trades'' and ''Tax Swap Sales'' defined

The Federal Board of Revenue has defined ''Wash Sales'', ''Cross Trades'' and ''Tax Swap Sales'' under the Income Tax Rules issued for the computation of capital gains on disposal of securities at the stock exchanges. According to the S.R.O.112(1)/2011 issued here on Saturday, the FBR has introduced a rule 13F on the ''capital loss adjustment disallowed in certain cases'' in the Income Tax Rules.
The capital loss adjustment as provided in rules 13D and 13E shall not be admissible in the following cases:
Wash sales: Where capital loss realised on disposal of a specific security by an investor is preceded or followed in one month''s period by purchase of the same security by the same investor, thus maintaining his portfolio.
Explanation: Wash sale is sale of a security at loss and repurchase of the same soon before or afterwards the sale so as to realise an unrealised loss to make it claimable as a set off against capital gain. The security sold in a wash sale is repurchased with the aim to re-acquiring it at or near its sale value in order to maintain the risk return profile of portfolio.
Cross Trades: Where co-ordinated reshuffle of securities between two related accounts of the same investor, between two related accounts of the related investors, between two membership cards of the same broker or between two related brokerage houses is undertaken and securities accumulating unrealised losses are sold to related accounts to artificially realise capital losses in one account without actually selling the securities to an outsider and the artificial losses so realised in an account are then used to minimise capital gain tax liability on the capital gain realised in the same account.
Tax Swap Sales: Where the investor having realised loss (as in the case of a wash sale) on a particular security does not repurchase the same security but chooses another similar security in the same sector thus not only minimising or eliminating altogether liability on account of tax on capital gain, but also maintaining the portfolio broadly at the same risk return profile, the Income Tax Rules added.