On May 28, 2024, the US settlement period for securities like stocks, bonds, ETFs, and some mutual funds will decrease from T+2 to T+1. While most retail investors may not notice this change, tax-smart investors will now need to act within one business day to make cost basis decisions.
Context
When an investor buys or sells a security, there are two key dates: the transaction date and the settlement date. The transaction date is the day the trade is executed, while the settlement date is when the transfer becomes official, meaning securities are delivered and payment is due. For example, under T+2 terms, if a trade executes on a Monday, it would settle on Wednesday (assuming no holidays). With T+1 settlement, the same trade would settle on Tuesday, one day sooner.
Why It Matters
The shift from T+2 to T+1 is unlikely to significantly impact investors purchasing securities, but it will increase time pressure on investors selling in taxable accounts. This is because selecting the optimal cost basis is crucial for tax planning, often involving the identification of specific tax lots. With T+1, investors now have just one business day to assign those tax lots. It’s essential to check with your broker, as they may have even more stringent time requirements for making cost basis changes.
