Last Day to Sell

The timing of a stock transaction can be especially important near the end of the year. You may be selling at a loss that would provide more tax benefit in the current year. On the other hand, you may have a gain that would be best postponed until the following year. Here is how to manage those year-end trades.

Trade date controls

If you’re selling stock (not closing a short position), the trade date is what matters. This is the day the transaction took place on the stock exchange. If you contact your broker before the market closes on the last trading day of the year, you can complete a sale in the current year. On major exchanges, the last trading day is December 31 unless that day falls on a weekend. It doesn’t matter if your transactions settles in the following year. See Trade Date and Settlement Date.

Limit orders. If you ordinarily place limit orders when selling, you may need to change that practice on a year-end sale. A limit order may fail to execute, postponing your transaction into the following year.

Bonds. If you’re selling bonds, don’t cut it too close. The bond market may close earlier than normal on the last trading day of the year.

Stock in the company where you work

If you own stock in the company where you work, you may not be free to sell whenever you want. To make sure they don’t run afoul of securities laws, most companies allow employees to sell shares of the company only during certain periods, often called trading windows. These differ from one company to the next. If it’s important to complete a sale of your company’s stock in the current year, be alert to these restrictions. Your last day to sell shares in the current year is the last trading day that occurs within a window period.

Exception for loss from short sales

In a short sale you sell shares borrowed from someone else rather than shares you already own. Typically you’re expecting the stock to decline in value so you can make a profit by using shares bought later at a lower price to meet your obligation to restore the shares you borrowed when you made the short sale. When you buy shares to close a short position, this purchase (like any other) has a trade date and a settlement date. The date that’s used for tax purposes depends on whether you have a gain or a loss:

• If you’re closing the short position at a profit, the trade date controls the timing for tax purposes. In other words, we use the same rule here as when you’re selling shares you own.
• If you’re closing the short position at a loss, however, the settlement date will control.

This peculiar result stems from an old IRS ruling and a more recent legislative development. The ruling noted that a short position isn’t actually closed until you deliver shares to replace the ones you borrowed. You can’t do that until your purchase of replacement shares closes, so that’s when you report gain or loss from closing a short position, according to this ruling. In a later development, Congress added a constructive sale rule to the tax law. The main thrust of this rule is to require you to report capital gain that’s built into an investment position as of the time you acquire an offsetting position. Shares of stock offset a short position in the same stock, so the purchase, which occurs on the trade date, can trigger built-in gain even though loss won’t be reported until the short position is actually closed, on the settlement date.

Summing up

As a general rule you can continue to make stock transactions affecting your capital gain or loss for the year up until the last trading day of the year. If you want to claim a loss from a short sale, however, you have to act early enough so the transaction will settle by December 31.