Can You Sell a Stock and Buy It Back the Next Day?
Understand the practicalities, account rules, and tax effects of selling a stock and buying it back soon after.
It is common for investors to consider selling a stock and repurchasing it quickly, sometimes even the very next day. This strategy might arise from a desire to lock in gains, re-evaluate a position, or adjust a portfolio. While rapid transactions are generally possible, several important factors come into play. Understanding these considerations is crucial for anyone contemplating swift trading activity.
Understanding Stock Transactions
It is generally possible to sell a stock and then buy it back, even on the same day or the following business day, provided there are sufficient funds and no specific account restrictions. The ability to do so hinges on the concept of “settlement periods,” which define when funds from a sale become officially available for new purchases or withdrawal. Most stock transactions in the U.S. now operate on a T+1 settlement cycle. This means that a trade executed on “Trade Date” (T) will officially settle one business day later (+1).
For example, if you sell shares on a Monday, the proceeds will settle and become fully available on Tuesday. While margin accounts typically allow immediate use of proceeds, cash accounts operate differently. In a cash account, using funds from a recent sale to make a new purchase before those funds have officially settled can lead to a “good faith violation.”
A good faith violation occurs if an investor buys a security with unsettled funds and then sells that newly purchased security before the original sale’s proceeds have settled. Accumulating several violations within a rolling 12-month period can lead to account restrictions, such as a 90-day period where trading is limited to only fully settled funds.
Trading Account Restrictions
Beyond the mechanics of fund settlement, specific regulations and brokerage policies can restrict frequent trading activities. A significant rule for active traders in margin accounts is the Financial Industry Regulatory Authority’s (FINRA) Pattern Day Trader (PDT) rule. This rule designates an individual as a “pattern day trader” if they execute four or more day trades within any five consecutive business days. These day trades must also represent more than six percent of the total trades in the margin account during that period.
To be classified as a pattern day trader, the activity must occur within a margin account, as the PDT rule does not apply to cash accounts. Once designated as a pattern day trader, the account holder must maintain a minimum equity of $25,000 in their margin account. This minimum equity, which can be a combination of cash and eligible securities, must be present in the account before engaging in any day trading activities. If the account equity falls below this $25,000 threshold, the pattern day trader will be restricted from further day trading until the minimum balance is restored.
Violating these PDT requirements can lead to restrictions on trading activity. A common outcome is that the brokerage firm may issue a margin call, and if not met, the account can be restricted to trading only on a cash available basis for 90 days.
Tax Implications of Rapid Trades
Engaging in rapid stock sales and repurchases can trigger a specific tax rule known as the “Wash Sale Rule.” This rule, established by the Internal Revenue Service (IRS), prevents investors from claiming a tax loss on a security if they sell it at a loss and then buy a “substantially identical” security within a specific timeframe. The wash sale period spans 61 days: 30 days before the sale date, the sale date itself, and 30 days after the sale date.
If a transaction is deemed a wash sale, the loss from the original sale is disallowed for current tax purposes. This disallowed loss is added to the cost basis of the newly acquired, substantially identical shares. This defers the tax benefit of the loss until the new shares are eventually sold. For example, if shares bought for $100 are sold for $80 (a $20 loss) and then repurchased within the wash sale period for $85, the $20 loss is disallowed, and the cost basis of the new shares becomes $105 ($85 + $20).
The term “substantially identical” generally refers to the same security, but can also apply to convertible preferred stock or options to acquire the same stock. The wash sale rule applies across all of an investor’s accounts, including taxable brokerage accounts and retirement accounts like IRAs. Selling a stock at a loss in a taxable account and repurchasing a substantially identical security in an IRA within the 61-day window would still trigger the rule. Investors are responsible for tracking wash sales across all their accounts, as brokers may only report them within a single account.