Bond Washing: This term is referred to a type of transaction of securities where tax avoidance is aimed at. It is sometimes seen that securities are sold cum-dividend with an agreement to re-sell or re-transfer the securities with a view to avoiding tax, the transfer by selling cum-dividend securities might get extra sale price which would be capital profit in this hands, no liability to tax. On the other hand, the interest from securities might be exempted from tax wholly or partly in the hands of the transferee by reason of this given hide or no income otherwise. Thus both purchaser and seller can get undue tax benefit which is unethical. This kind of systematic transaction to avoid tax is called Bond Washing transaction.
To achieve this, a bondholder finds a buyer that is willing to purchase the bond and receive the coupon as the bondholder of record. The buyer agrees to sell the bond back to the original holder at a predetermined date after the tax period closes. It the act of selling securities cum dividend and buying them back later ex-dividend, or selling US Treasury bonds with the interest coupon, and buying them back ex-coupon, so as to reduce tax
