Sunday, March 08, 2020

Using Unsettled Funds

 This post is a continuation of the $50 a month stock challenge I started October 14, 2019.  Click on, "No Commission Stock Trades", on the right side of the page to read from the start.

   Yesterday I explained unsettled funds and why I have not been using them in this series. Every trade in this series is an ACTUAL trade in my personal account.

     I just use a portion of my real account to document my $50 a Month Challenge trades.

     When I tell you about my purchases, rest assured they are trades but understand they are not in the same quantities as stated. When I announce I have purchased 1 share of a stock for the series account, that 1 share is just a portion of the real number I purchased in my regular account.

     I sometimes use "unsettled funds" in my real account for 2 different reasons but always in the same way. Sell when the price is up  and buy when the price is down.

     Sell "XXX" stock on an up day and buy "YYY" stock if a large down day comes before "settlement date", ONLY  with the understanding "YYY" stock has to be held until its settlement date.

     Another way is sell "XXX" on a LARGE UP DAY and repurchase purchase "XXX" for a lesser amount with unsettled funds. An example would be, sell "XXX" for $54.00 a share and rebuy all of it, part of position, or more if you have the money, for $53.00

    Lets assume you sold 2 shares @ $54.00 and repurchased 2 shares @ $53.00. You now have the same number of shares you started with but also have $2 cash ($1 x 2 shares) profit. This strategy will work by rebuying the same day or the next day, remember the day after that it becomes settled funds.

    Remember you have to abide by the "day trading rule" of not exceeding 3 day trades in any 5 day rolling period. Also when selling, you may or may not get to repurchase at a lower price.

    By far the most important rule to remember is that "IF" you sell a stock at a "loss" ,  you "can not repurchase" that stock for 31days ( IRS Wash Rule ). Meaning you can not write off you losses if you do.

     You also must remember is you have "multiple purchases" of a stock at different prices, the IRS looks at each stock purchase price and not your overall average stock price.

Example of purchase price
  2 "XXX" @ $55.00 = $110.00
  1 "XXX" @ $53.00 = $ 53.00
  2 "XXX" @ $51.00 = $102.00
                 TOTAL         $265.00 

You see an average price  of the 5 shares $53.00, 
sell for $54.00 x 5 shares = $270 for a $5 profit.

The IRS sees the $54.00 sale as
   2 "XXX" @ $55.00 = $2 loss
   1 "XXX" @ $53.00 = $1 profit
   2 "XXX" @ $51.00 = $6 profit

    Abide by the "wash rule" and the IRS says you have $7 profit minus your $2 loss and use $5 for your taxable base.

    Violate the "wash rule" and your "loss" is disallowed, leaving you with a $7 taxable base. That is an increase of 40% taxes owed on this trade. You are paying taxes on $7 but only made a $5 profit.

     Simple answer, don't break the rules or it will cost you. I have more to say about this but I do not want this blog post is long enough already.

     Remember there are NO dumb questions, just people that don't understand and are afraid to ask, either in comments or by e-mail. Your name will not be revealed (if asked not to be), but I will try to answer your question in a blog post.

 Disclaimer, I am not a professional.

your comments are welcome and appreciated or







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