Trade Date and Settlement Date - (2024)

For most purposes, the tax law relies onthe trade date and ignores the settlement date— but there are exceptions.

Stock transactions occur in two steps that normally occur on different days. The first occurs on the trade date. The second occurs on the settlement date.

Trade date vs. settlement date

Thetrade occurs when there is agreement between the buyer and seller. This can happen almost immediately after you place an order with your broker. For practical purposes, the buyer becomes the owner when the trade occurs. Any subsequent change in the price of the stock will affect the buyer, not the seller.

Yet the shares and cash generally don’t change hands until the settlement date. Currently this is two trading days after the trade date, known as T+2. Assuming there is no intervening holiday, a trade on Monday settles on Wednesday, and a Friday trade will settle Tuesday. (A move to T+1 is scheduled for 2024.)

Importance of distinction

For each stock transaction we have two dates that are potentially significant. 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 sharesoccurred 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 measured 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 with a trade date of 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.

Exceptions

You should be aware of a couple of exceptions:

• When you close a short saleat 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.