Are My Capital Gains Recognized on the Trade or Settlement Date?
There are two related and important dates when you buy or sell stock.
- The trade date is the date when you place an order to buy or sell.
- The settlement date is the date that the cash or shares are transferred to or from your account. The settlement date for US stock trades is typically two business days after the trade date, although there are a few exceptions. Other securities use different settlement time frames.
What is Transferred on the Settlement Date?
Shares or cash are legally transferred to you on the settlement date, but your trade date signals a legal obligation to sell or pay for shares. It’s important to know which date is considered the sale date for tax purposes. Why? You need to know whether your transaction occurred in a given tax year, and whether the holding period was short or long term.
In most cases, tax law considers the trade date as the date on which a gain or loss is recognized.
If you sell a stock at a gain on December 31, you are responsible for any capital gains tax in the current tax year, even though the trade won’t settle until the next year.
The trade date also controls whether your capital gains are considered short term or long term. And don’t forget, capital gains from some small business stock may be tax exempt, so consider qualified small business stock (QSBS) as part of your overall tax strategy.
Looking for specific advice on QSBS? Contact us to learn more.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.