Accommodation Trading - Explained
What is Accommodation Trading?
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Table of ContentsWhat is Accommodation Trading?How does Accommodation Trading Work?Example of Illegal Accommodation TradingAcademics Research on Accommodation Trading
What is Accommodation Trading?
Accommodation trading is an illegal trading in which a trader agrees to accommodate another trader through a non-competitive stock trade. It is a type of trade in which two or more traders cooperate to trade a security for another at a price lesser than the current market price, believing that it will be traded back at the same price. An accommodation trading might also be referred to as a wash sale depending on the context of the trade. Usually, traders use accommodation trading as an illegal trading to avoid paying taxes.
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How does Accommodation Trading Work?
When two traders cooperate to exchange a stock or security at a price below the market price of the security, an accommodation trading has occurred. It is an intentional but illegal way of accruing a significant capital loss on the security solely to avoid paying taxes on the security. Once time passes, trade is reverse. Many countries frown against accommodation trading, it is unlawful and an unethical way of cheating the government. In most cases, accommodation trading and money laundering go hand in hand. Nevertheless, there are some cases under securities law where accommodation trading is acceptable. Situations that may warrant accommodation trading are contained in securities law.
Example of Illegal Accommodation Trading
This is an example of accommodation trading; Joan bought a stock at $100 per share. But when it is time to file tax reports and make tax payments, Joan enters an accommodation trading with Ryan who agrees to purchase the stock at $65 per share ad against the $120 per share that the stock is currently trading in the market. Using this accommodation trading technique, Joan has realized a $35 loss on his stock and this will be included in his tax report and result in less tax payment. Once he is done with tax matters, Joan buys the stock back from Ryan at the same $65. Using this illegal trading, Joan has successfully cheated the tax system since he didn't realize any loss in the real sense.