Accommodation trading is a strategy that involves the cooperation of two or more investors in creating a transaction that involves the sale of assets at below market prices, with a subsequent repurchase of those same assets at the purchase price at an agreed-upon future date. This process, sometimes known as a wash sale, makes it possible for an investor to realize a capital loss, which in turn means a deduction on taxes. While this particular approach is legal in some jurisdictions around the world, there are nations that have imposed regulations that either limit or forbid this type of activity. In addition, some brokers will not participate in this type of arrangement, considering it to be unethical.
In order to understand the way that accommodation trading functions, consider the case of an investor who needs to sell an asset at a loss in order to lower his or her overall tax burden. That investor will find a buyer who agrees to buy the asset for a price that is roughly a third of the current market value, hold onto the asset for a period of several months, then sell the asset back to the original owner. In order for the sale to be considered a wash, it must be even, meaning that the buyer sells the asset back at the same price he or she paid for it at the beginning of the accommodation trading deal.
Both parties stand to benefit from accommodation trading. The seller is able to secure the capital loss and obtain a tax break that saves a fair amount of money. At the same time, the buyer has use of the asset for the agreed-upon time frame and will also receive any dividends or interest payments on the asset that are realized during the period in which he or she holds that asset. Under the best of circumstances, both parties are able to complete the final phase of the accommodation trading and walk away from the deal having gained the benefits that both hoped to achieve.
There are some potential drawbacks to accommodation trading. For the buyer, the asset may fail to perform as anticipated, resulting in less of a return from the strategy than anticipated. Should that fall in market value reach a certain point before the seller files his or her tax returns, this could also mean that a greater tax break would have occurred if the asset had not been sold, effectively defeating the entire purpose for the trading activity. Owing to the fact that some in the investment community frown upon accommodation trading in general, and the potential risks involved in the activity, it is often a good idea to find other ways to manage the tax burden.
