What Is Wash Trading And How It Works?
Story: Mohd Javed
December 27, 2022
Wash trading is an illegitimate process wherein an investor simultaneously buys and sells a financial instrument with the intent to manipulate ane mislead the market.
This is often done to provide brokers with commission fees in order to compensate for securities they failed to settle outright.
Wash trading is unlawful under U.S. law, and the IRS prohibits taxpayers from deducting losses that arise from wash trades from their taxable income.
It can be executed by high-frequency trading companies and cryptocurrency exchanges to manipulate prices.
The most viable solution for exchanges to track wash trading is implementing technical solutions that enable self-trade prevention.
Authorities can regularly check the investment losses claimed at the party versus the tax on gains they are paying.
In addition, one can implement a model to track such numbers, allowing them to raise a red flag on any suspicious transaction.