Can You Buy Stock and Sell It the Same Day?

Trading in the stock market involves buying and selling shares of companies. This activity ranges from long-term investments, where shares are held for years, to very short-term strategies, often called day trading, where shares are bought and sold within the same day. Day trading is subject to specific regulations and can have distinct financial implications depending on how an account is structured and managed.

Understanding Day Trading Rules

A “day trade” refers to the buying and selling, or selling and buying, of the same security within a single trading day in a margin account. The Financial Industry Regulatory Authority (FINRA) has established rules that govern day trading activities, particularly concerning what constitutes a “Pattern Day Trader.”

You are classified as a Pattern Day Trader if you execute four or more day trades within any five consecutive business days, and these trades represent more than six percent of your total trades in a margin account during that same five-business-day period. Once designated as a Pattern Day Trader, specific requirements apply, primarily a minimum equity threshold.

Pattern Day Traders must maintain a minimum equity of $25,000 in their margin account on any day they engage in day trading. This required equity, which can be a combination of cash and eligible securities, must be present in the account before any day trading activities commence. If the account’s equity falls below this $25,000 threshold, the Pattern Day Trader will be restricted from further day trading until the account is restored to the minimum equity level.

Additionally, Pattern Day Traders are limited in their “day-trading buying power,” which is generally capped at four times the maintenance margin excess from the previous day’s close. Exceeding this buying power can lead to a day-trading margin call, requiring additional funds to be deposited within five business days to avoid further trading restrictions, potentially limiting the account to cash-available basis trading for 90 days.

Account Types and Day Trading

The type of brokerage account you hold significantly impacts your ability to engage in day trading. Investors use either cash accounts or margin accounts, each with distinct rules governing trade execution and fund availability.

Cash accounts require that all securities purchases be paid for in full, and trading can only occur with settled funds. A key limitation in cash accounts is the “good faith violation,” which occurs if you buy a security with unsettled funds and then sell that security before the initial funds have settled. For example, if you sell stock on Monday, the proceeds may not settle until Tuesday due to settlement periods, and using those unsettled funds for a new purchase that you then sell before Tuesday would result in a violation. Accumulating multiple good faith violations (typically four or more within a rolling 12-month period) can lead to account restrictions, such as being limited to buying with settled funds only for a period of 90 days.

Margin accounts allow traders to borrow funds from their brokerage firm to execute trades, which can amplify both potential gains and losses. These accounts are subject to the $25,000 Pattern Day Trader rule; if flagged, you must maintain this minimum equity to continue day trading.

Margin accounts also have maintenance margin requirements, which specify the minimum amount of equity that must be maintained in the account relative to the value of the securities held. If the account’s equity falls below this maintenance margin, a margin call will be issued, requiring the deposit of additional funds or securities to bring the account back to the required level. Failure to meet a margin call can result in the forced liquidation of positions by the brokerage firm to cover the deficit.

Trade Settlement Periods

Trade settlement is the process where the actual transfer of securities to the buyer’s account and funds to the seller’s account occurs, formalizing the transaction. This is distinct from the trade date, which is simply when the order is executed.

Currently, the standard settlement cycle for most securities transactions in the U.S. is T+1. This means that trades for stocks, bonds, municipal securities, exchange-traded funds, and certain mutual funds settle one business day after the transaction date. For example, a trade executed on Monday would settle by Tuesday.

The settlement period is particularly important for traders using cash accounts. Since funds from a sale are not considered “settled” until the settlement date, they cannot be immediately reused to purchase new securities without potentially incurring a good faith violation. This means that even with a T+1 settlement, a trader in a cash account cannot buy and sell the same security multiple times in a single day using the same capital without facing restrictions, as the initial sale’s proceeds would not have settled by the time of a subsequent purchase and sale.

Tax Considerations for Day Trading

Frequent trading, such as day trading, carries specific tax implications that differ from long-term investing. The primary distinction lies in how capital gains are classified and subsequently taxed. When securities are bought and sold within the same day, or held for a year or less, any profits generated are typically categorized as short-term capital gains.

Short-term capital gains are subject to taxation at an individual’s ordinary income tax rates. These rates can be higher than the long-term capital gains rates, which apply to assets held for more than one year. The tax bracket an individual falls into determines their ordinary income tax rate, which can range from 10% to 37% for the highest earners. This means that profitable day trading can lead to a substantial tax liability.

Another important consideration for active traders is the “wash-sale rule” enforced by the Internal Revenue Service (IRS). This rule prevents taxpayers from claiming a loss on the sale of a security if they purchase the same or a “substantially identical” security within 30 days before or after the sale date. The 61-day period (30 days before, the sale day, and 30 days after) aims to prevent investors from generating artificial tax losses by selling a security at a loss only to immediately repurchase it. If a wash sale occurs, the disallowed loss is added to the cost basis of the newly acquired security, which can impact future tax calculations. This rule applies to various securities, including stocks, bonds, options, and exchange-traded funds.