Is a Stock Sale Reportable Based on Trade Date or Settlement Date?

The date you buy or sell shares is not exactly the date these securities change hands between you and the other party. Especially when reporting your taxable gains, losses and how long you held shares to the tax authority, understanding the crucial distinction between trade date and settlement date can save you money.

Trade vs. Settlement

Especially when trading online, a buy or sell order for a fast-paced, frequently traded stock often goes through within seconds. When you place a buy order for 10 Apple shares at $400 each, you may see those 100 shares added to your account and $4,000 deducted from your cash balance almost immediately. However, the ownership of those shares won't be transferred to you until the settlement date, which is three business days later. This is known as t+3. If, for example, you purchase shares on Monday January 2, the ownership will be transferred on Thursday January 5, which is the settlement date.

Reporting Date

When you report transactions, you must use the trade date as opposed to the settlement date. On tax forms, the date for the purchase in our example will be January 2. Similarly, on the monthly statements that you receive from your brokerage firm, the trade carries a date stamp of January 2. In fact, you can in most cases ignore the settlement date. Focusing on the trade date for record keeping purposes avoids confusion. When you must calculate the settlement date, where holidays and weekends are involved, add three business days, which will correspond to more than three calendar days. A trade completed on Friday will settle on Wednesday of next week, for example.

Importance

The precise date of your trades becomes crucial when you're trying to ensure that a profitable trade qualifies as a long-term gain. If a financial security is held for one full year following its purchase, the gains from the subsequent sale are considered long-term capital gains. Had the security been held for less than a year, the profits would have been considered short-term capital gains for taxation purposes. Long-term capital gains are taxed differently than short-term gains. Especially for taxpayers in top or nearly-top tax brackets, the difference can be significant. The IRS specifically cautions tax filers to use the trade and not the settlement date when reporting stock trades.

Selling Before Settlement

A question that often comes up when explaining the concept of settlement dates is how an investor can sell a stock before the settlement date. If the stock you bought on January 2 does not become yours until January 5, how can you sell it on January 3, a day after you bought it? The answer simply is that you can sell it on January 3, because you will deliver the shares associated with your January 3 sale only on January 6. Therefore, you can sell shares as soon as you successfully purchase them, even within seconds.

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About the Author

Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.

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