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.
Other Items to Consider
Some other areas to keep in mind when evaluating the gains include:
Has the 5-year holding period been achieved? In order to receive the QSBS exclusion, stock needs to have been held for at least 5 years. The holding period start date for securities varies based on the type of security (i.e. the 5-year clock on stock options generally does not begin until the options are exercised, etc.). If stock was sold prior to the 5-year holding period it may be rolled over into other QSBS stock, but you only have 60 days to make this happen, so let us know if you need help.
What if gains are received in Installment sales? Installment sales generally may not be relied upon to satisfy the 5-year holding period requirement. While not covered directly in IRC Section 1202, such arrangements may be considered to be disqualifying hedging transactions under Section 1202(j). However, installment treatment may become useful with respect to Section 1045 rollovers. In the article, “Quest for Quantum Exclusions”, the authors note how the Opportunity Zone regulations allow a taxpayer to begin the rollover period when each installment is received, which may offer some guidance for how the IRS would view the QSBS rollovers.
How We Can Help
Are you managing a portfolio of securities or seeking to substantiate that your gains qualify as QSBS? We can help you identify, assess, monitor and validate QSBS eligibility. Learn more here.
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.
