Can You Buy and Sell Stocks in the Same Day?

It is possible to buy and sell stocks within the same trading day, an activity commonly known as day trading. This practice involves opening and closing a stock position during a single market session, aiming to profit from short-term price fluctuations. Engaging in such rapid transactions requires an understanding of specific market rules, tax implications, and the types of brokerage accounts suitable for this activity.

Understanding Day Trading

Day trading involves purchasing and selling the same security within a single trading day. Positions are opened and closed before the market officially closes, preventing exposure to overnight price changes. Day traders seek to capitalize on minor price movements that occur throughout the trading session.

This approach differs from long-term investing, where securities are held for extended periods, or swing trading, which involves holding positions for a few days or weeks. Day trading emphasizes quick entries and exits, focusing on intraday market volatility to generate profits from small shifts in a stock’s value.

Pattern Day Trader Rules

The Financial Industry Regulatory Authority (FINRA) has established specific regulations for individuals who frequently engage in day trading, particularly those using margin accounts. An individual is classified as a “Pattern Day Trader” (PDT) if they execute four or more day trades within a rolling five-business-day period. This classification applies when these day trades constitute more than six percent of the total trades in their margin account during that same five-day timeframe.

Pattern day traders must maintain a minimum equity of $25,000 in their margin account on any day they engage in day trading. This minimum equity, which can consist of a combination of cash and eligible securities, must be present before any day trading activities commence. If the account’s equity falls below this $25,000 threshold, the pattern day trader will not be permitted to execute further day trades until the account is restored to the required minimum level.

Exceeding the day-trading buying power limitation can result in a day-trading margin call issued by the brokerage firm. The trader has up to five business days to deposit funds to meet this call. Until the margin call is satisfied, the account’s day-trading buying power may be restricted. If the margin call is not met by the deadline, the account can be further restricted to trading only on a cash available basis for 90 days or until the call is met.

Tax Implications of Day Trading

Profits generated from day trading are subject to capital gains taxes. Since day trading involves holding securities for one year or less, any gains realized are classified as short-term capital gains. These short-term gains are taxed at an individual’s ordinary income tax rates, which can range from 10% to 37%, depending on their overall taxable income.

Conversely, any losses incurred from day trading can be used to offset capital gains. If capital losses exceed capital gains in a given tax year, up to $3,000 of the excess loss can be deducted against ordinary income. Any remaining capital losses beyond this $3,000 limit can be carried forward indefinitely to offset capital gains or ordinary income in future tax years.

Accurate record-keeping of all trades, including purchase and sale dates, prices, and associated fees, is important for tax reporting purposes. Most individuals engaging in day trading are considered investors for tax purposes, meaning their profits are subject to capital gains rules.

Brokerage Account Requirements

To engage in day trading, the type of brokerage account held is important. There are two primary types: cash accounts and margin accounts. Cash accounts require that all transactions be made with only the available cash, and securities purchased must be paid for in full before they can be sold.

Due to settlement periods, typically one to two business days for stock transactions, day trading is not permitted in cash accounts. Attempting to buy and sell the same security in a cash account on the same day can lead to “good faith violations” and trading restrictions.

Margin accounts, on the other hand, allow traders to borrow funds from their broker to purchase securities, thereby increasing their buying power. These accounts are necessary for day trading, especially for those who meet the “Pattern Day Trader” designation, as the associated rules primarily apply to margin accounts.