What Happens When Trade and Settlement Dates Straddle the New Year

Also: Another pass at the wash sale rule. Some things can't be explained too often.
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I sold my losers on Dec. 30. On the confirmation slip it is listed as such but with the settlement date as Jan. 3, 2000. These stocks are still listed on my final year-end brokerage statement. Can I use these losses as I had planned on my 1999 return? The trade date is listed as Dec. 30, and the year-end statement notes the trades as pending although they were closed and priced immediately on Dec. 30. -- John Feddersen


You can -- in fact, you must -- report your losses on your 1999 tax return.

The trade date is the day that counts for capital gains purposes on your long positions. If you sold, say, 100 shares of


(K) - Get Report

on Dec. 31, 1999, any gain or loss would count for 1999. It doesn't matter that the settlement date -- the day money or securities change hands -- didn't occur until early January.

But if you make a short sale, the settlement date is used for capital gains purposes because that's when the position is closed.

A short sale is a bet that a stock is going to fall. You borrow a security from a broker and then sell it. Later on, you'll buy the stock back -- hopefully at a lower price. The day you do that is the trade date. But it's not until you actually return the security to your broker -- on the settlement date -- that you can determine your gain or loss on the transaction. It's at this point that the short position is closed and there is a taxable event.

See this previous

Tax Forum for more on taxes and settlement dates.

Wash Sale Apology

I read your Oct. 3, 1998 article on the wash sale rule and I'm sorry to say I still don't understand it. From the article, it sounds like if you buy a security on Monday, then sell it at a loss on Tuesday, you


claim the loss (after waiting for 30 days), provided you don't buy the stock back again within the 30-day period. Is this correct? It would make sense, since I do have a real loss in this case (i.e., less money and no stock). -- Bob Gillespie


Please don't apologize for being confused by the wash sale rule. We all are. And since there are only 26 days until April 17, it's worth going over again.

You are correct about your own case, Bob. If you buy a stock on Monday and sell it on Tuesday for a loss, you can claim the loss on your tax return as long as you stay out of the position for at least 30 days.

The wash sale rule was created to prevent taxpayers from benefiting when there is no real economic loss. If you buy on Monday for 10, sell at 8 on Tuesday and buy the stock back on Wednesday at 7, your economic position has not changed. But without the wash sale rule, you'd get to report a $2 loss on your tax return. That's not really very fair, says the

Internal Revenue Service


But if you buy a stock at 10 and sell the next day at 8, as long as you stay out of the stock, you do have an economic loss. Less money, no stock, as you pointed out.

Big note: If you buy a security on Dec. 28 and sell it at a loss on Dec. 30, you still have to wait the 30 days, reminds Gail Winawer, tax securities partner at

American Express Tax & Business Services

in New York. So if you buy the security back on Jan. 5, you will have created a wash sale and the loss will be disallowed.

Send your questions and comments to

taxforum@thestreet.com, and please include your full name. Tax Forum appears daily through April 17.

TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.