Trader’s Ask: How Does Settlement Date Affect Trader Taxes?
New T+1 rules for settlement date of securities went into effect May 28, 2024 for US listed stocks, bonds, ETFs and similar securities. How do these changes affect your trader tax reporting?
Understanding Settlement Date
The day you order a buy or execute a sell of a security is called the trade date (T). Settlement date is the day when everything is finalized and funds or securities are delivered. The Securities and Exchange Commission (SEC) dictates settlement windows for US markets to ensure consistent and fair processes. The required settlement window is usually referred to as T+__. With a number indicating the business days after the trade date when settlement must occur (T+1, T+2, etc).
Did you know? Before the advent of today’s digital processing, settlement took much longer: As much as 30 days before the 1970’s! As the technology has advanced, that window has reduced.
In February 2023, the SEC approved a change in the standard settlement window for most broker transactions. This change from T+2 to T+1 went into effect May 28, 2024. Options contracts already had a T+1 settlement date.
Key Point: Beginning May 28, 2024 stocks, ETFs, and options all have a T+1 settlement date.
How Settlement Impacts Tax Reporting
For many traders, the settlement date has little impact on their day-to-day trading. Perhaps you’ve noticed on your monthly broker statement a listing of “unsettled” or “pending settlement” transactions. These would need to be factored into determining holdings at year end.
In general, the IRS requires transactions of stocks, ETFs, options and similar securities to be reported on the trade date. Therefore, the settlement date is generally not used for tax purposes.
However, short sales are an exception: The IRS says to report the date a short sale is acquired as the trade date of the buy to cover transaction. The date sold reported is the date you “delivered” the property; this would be the settlement date of the buy to cover transaction. Of course the IRS makes it a little more complicated if the short sale closes with a resulting gain. In those cases the constructive sale rule applies. You can click here to read more about how to report short sales.
Key point: settlement date is used in the reporting of short sales for tax purposes.
Short sales that occur at the end of a tax year could potentially be reported in the following tax year, depending on settlement date.
For example, if a short sale of stock closed at a loss on December 28 or 29, 2023 (trade date), then it would likely be reported in the 2024 tax year because the settlement period was T+2. Since December 30 and 31 were weekend days, and January 1 is a market holiday, the settlement date would not be before January 2, 2024. Consequently, the loss would be reported in the next tax year, which could increase tax liability.
The now-shorter T+1 settlement period for securities means you’ll more likely report most short sale losses in the tax year they occurred. For 2024, only shorts that closed at a loss on December 31 (trade date) would risk being reported in 2025. Therefore, settlement date changes may help reduce tax liability for some traders.
Key point: T+1 settlement dates may help keep some losses in the tax year.
You may wonder about wash sales? Wash sale adjustments are generally determined using the trade dates, not settlement dates. Therefore, the trade date of the loss is used to determine the 61-day wash sale period. And the trade date of any repurchased shares or contracts would be used for considering a “replacement”.
Key point: Trade date is used for determining wash sale adjustments.
TradeLog Will Automatically Apply These Changes
TradeLog version 20.4 automatically accounts for the change in settlement periods. The software applies T+1 for trades occurring on or after May 28, 2024. So, as a TradeLog user, you won’t need to worry about the settlement rule changes. Also, unlike Broker 1099-B reporting, TradeLog will apply the Constructive Sale Rule when calculating taxable gains/losses for Form 8949–as required for taxpayers.
TradeLog also uses settlement rules with the Baseline Positions Wizard, for first-time TradeLog users. The wizard will help identify the baseline positions needed for your TradeLog Starting Point. After entering the “Holdings” as of the end of the prior tax year, TradeLog will account for trades pending settlement using your imported trade history. Learn more about the Baseline Positions Wizard on our Support Center.
Bottom Line: Settlement Date Changes Simplify Trader Tax Reporting, But Have Minimal Impact
The SEC rules for T+1 settlement of securities are a welcome change in the age of high-volume digital trading. But this change has minimal impact on most traders’s day-to-day business. At tax time, the T+1 rules for securities and options makes tax reporting more consistent and may help keep more losses in the tax year. Using TradeLog, a trader can take control of their reporting: properly accounting for short sales including application of the constructive sale rules.
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.