Investors engage in wash trading by simultaneously buying and selling financial instruments to manipulate and mislead the market.
For securities not settled outright, brokers are often compensated with commission fees.
Under U.S. law, the IRS does not allow taxpayers to deduct losses resulting from wash trades from taxable income.
Companies that execute high-frequency trading and cryptocurrency exchanges can use it to manipulate prices.
Investing in technical solutions that prevent self-trade is the most effective way for exchanges to track wash trading.
The authorities can conduct a regular check to determine whether the investment losses claimed at the party are in line with the gains they are paying tax on.
A model can also track such numbers, raising a red flag on suspicious transactions when they are followed.