There are few limitations to stop an investor from the process of buying a stock, selling the stock and then buying it back again as a longer-term holding. In fact, the investor's broker will be pleased to earn the extra commissions in such a series of transactions. However, all investors should be aware of several rules governing the rapid buying and selling of stocks.
When an investor buys shares of stock, she has three days to pay for the purchase by depositing the money with her broker. This is referred to as a three-day settlement. If the purchased shares are sold within the three-day period -- without the investor paying for the initial purchase of the shares -- the act is called freeriding. Freeriding is prohibited by Regulation T of the Federal Reserve Board. Freeriding only occurs in a cash account, not a margin account. If an investor is found to be freeriding her account may be frozen for up to 90 days, and stock purchases will only be accepted if money is in the account to immediately pay for the shares.
Wash Sale Rule
The wash sale rule prevents an investor from selling stock to cover a tax loss and then immediately repurchasing the shares. To have a loss from the sale of stock qualify as a tax write off, the investor must wait at least 30 days before repurchasing the shares. If the shares are bought within 30 days of the sale, the IRS will rule the transaction a wash sale and disallow any tax write offs.
Capital Gains Holding Period
Stock investments held for less than one year and sold for a profit are considered short-term capital gains. Short-term gains are taxed at the investor's regular tax rate. If the stock is owned for longer than a year, long-term capital gains tax rates apply. Long-term gains are taxed at a much lower rate than short-term gains. Owning shares of stock for only 30 days is not long enough to qualify for the lower tax rates, and as a result any gains will be taxed at the investor's regular rates.
Day Trading Warnings
The rapid buying and selling of stock can trigger the requirement to have the investor's account designated as a pattern day trading account. A day trade is the purchase and sale of a stock in the same trading day. If an investor day trades more than four times in any five day period, he will be designated as a pattern day trader. A pattern day trading account must maintain minimum investor equity of $25,000, and cash withdrawals are restricted.
- Photo Credit Hemera Technologies/Photos.com/Getty Images
30 Day Rule of Buying & Selling Stock
Money lost on investments can be tax deductible and as such reduce your tax burden. Many investors sell losing positions in December...
How to Stop Broker Lending on a Short Sale Stock Account
An investor who wishes to "short sell" a stock is hoping that the stock goes down in value. That is, the investor...
How to Buy & Sell Stock Options
Comments. Video Transcript. Hello, I'm Roger Groh with Groh Asset Management. Today we're here to talk about how you buy or sell...
Do You Need to Pay Capital Gains Tax on Inherited Property If Sold?
The way you acquire property has no effect on the timing or amount of capital gain you must recognize. As a result,...
How Long Do I Have to Wait Before I Can Buy the Same Stock?
If you sold some shares of stock and want to invest in the stock again, you should be aware of the wash...
How to Buy and Sell Stocks Online
Find an online broker. You must have an online brokerage account in order to buy and sell stocks online. There are many...
Can You Sell Purchased Stock Before a Settlement?
Settlement is the delivery of stock against the full payment that must take place within three business days after the trade. You...