By Kaye A. Thomas
Current as of May 20, 2018
For most purposes, the tax law relies on the trade date and ignores the settlement date — but there are exceptions.
Many investors think a purchase or sale of stock is complete when the broker fills their order. As a practical matter this is true: buyer and seller are locked into the transaction, and the price, as of that time. Yet the shares and the cash generally don’t actually change hands until two business days later. The day your broker fills the order is known as the trade date, and the day the transaction closes is the settlement date.
It’s important to know which date controls for tax purposes. Here are some of the reasons it matters:
- We need to know whether a sale transaction occurred before or after the end of a year.
- We need to know whether the holding period was short-term or long-term at the time of a sale.
- If you sold shares at a loss, we need to know if any transaction in which you bought replacement shares occurred within the wash sale period.
- If you received a dividend, we need to know whether you held the shares long enough for it to be a qualified dividend.
In all these cases, we may get one answer when using the trade date but a different one if we measure by the settlement date. In part this is because the time for settlement is measures in business days, but the time periods used in the tax law generally use calendar days. For example, the 61-day wash sale period includes the date of sale plus the 30 calendar days before and after that date. The time between the transaction date and settlement date can be anywhere from two to five days, depending on whether a holiday and/or weekend intervenes.
General rule: trade date controls
For most purposes, the tax law uses the trade date for both purchases and sales. For example, if you sell stock on December 31, you’ll report the gain or loss that year, even though the transaction will settle in January. Trade dates also govern in determining whether your holding period is short-term or long-term, in determining whether the wash sale rule applies, and in determining whether you have a qualified dividend.
You should be aware of a couple of exceptions:
- When you close a short sale at a loss, the tax law treats the transaction as occurring on the settlement date. See Last Day to Sell.
- If you hold more than one lot of shares and sell part of your holdings, you may want to identify the shares you’re selling. You can identify shares (or change your identification) until the settlement date. See How to Identify Shares.