Direct Answer
A cash brokerage account requires all purchases to be paid in full with settled funds. Equity trades settle T+1 (one business day after trade date). Using unsettled sale proceeds to buy and sell again can trigger Regulation T violations (good-faith violation or freeride). No borrowing, no margin. No contribution limit; no tax sheltering. All gains and income are taxable annually. SIPC covers up to $500,000 per customer in each separate capacity, including a $250,000 limit for cash.
Cash Brokerage Account Profile: Settlement, Margin and Reg T Rules
This profile cites SEC, FINRA, and Federal Reserve primary sources. It does not provide personalized investment or tax advice. Trading rules and settlement timelines may change; verify current rules with your broker and FINRA.org.
What is a Cash Brokerage Account?
A cash brokerage account is a taxable investment account where all transactions must be fully paid for with settled funds at the time of purchase. No borrowing from the broker is permitted. Cash accounts are governed by Federal Reserve Regulation T (Reg T), which requires payment in full within a specified period.
Key characteristics:
- No margin: You can only invest money you already have in the account and that has settled.
- T+1 settlement: Equity trades settle one business day after the trade date (effective May 2024 under SEC amendments to Rule 15c6-1).
- No contribution limits: Unlike retirement accounts, you can deposit and invest any amount.
- Fully taxable: Gains, dividends, and interest are taxable in the year realized.
- SIPC protection: up to $500,000 per customer in each separate capacity (including a $250,000 limit for cash).
Settlement Rules and Regulation T Violations
Cash account holders must be aware of trading violations that arise from using unsettled funds:
| Violation Type | What Triggers It | Consequence |
|---|---|---|
| Good-faith violation | Buy security with unsettled proceeds from a prior sale, then sell before those proceeds settle | Set by each broker; many brokers apply a 90-day settled-cash restriction after repeated violations |
| Freeride violation | Buy security without sufficient settled funds, then sell the security to pay for the original purchase | Immediate 90-day settled-cash restriction |
| Liquidation violation | Sell another security to cover a purchase made without sufficient settled funds | Counted toward good-faith violation limit |
Source: FINRA Rule 4210; Federal Reserve Regulation T (12 CFR 220). Under the 90-day settled-cash restriction, all purchases must be fully paid with settled cash already in the account before the trade is placed.
Tax Treatment
Cash brokerage account gains are taxable in the year they are realized. Key rules:
- Long-term capital gains (LTCG): Assets held more than 12 months qualify for 0%/15%/20% preferential rates depending on taxable income.
- Short-term capital gains (STCG): Assets held 12 months or less taxed as ordinary income at marginal rates.
- Qualified dividends: Taxed at long-term capital gains rates (requires holding period and eligible payer criteria).
- Net Investment Income Tax (NIIT): 3.8% surtax on net investment income for single filers above $200,000 MAGI or MFJ above $250,000 MAGI.
- Wash sale rule: A loss is disallowed if you buy a substantially identical security within 30 days before or after the sale (IRC Section 1091).
The broker reports transactions on Form 1099-B (sales proceeds and cost basis) and Form 1099-DIV (dividends) annually.
Frequently Asked Questions
- What is a cash brokerage account?
- A cash brokerage account requires all purchases to be paid in full with settled funds. No borrowing is permitted. Equity trades settle T+1 (one business day after trade date) under SEC rules effective May 2024. Governed by Federal Reserve Regulation T. No contribution limit. All gains and income are taxable annually. SIPC covers up to $500,000 per customer in each separate capacity, including a $250,000 limit for cash. Source: SEC Rule 15c6-1; FINRA Rule 4210.
- What is a good-faith violation in a cash account?
- A good-faith violation occurs when you buy a security using unsettled sale proceeds and then sell that security before those proceeds settle (T+1). Many brokers apply a 90-day settled-funds-only restriction after repeated good-faith violations, but the count is set by each broker rather than by Regulation T. A freeride violation -- buying without sufficient funds and selling to pay for the purchase -- triggers an immediate 90-day restriction. Source: FINRA Rule 4210; Federal Reserve Regulation T.
- How is a cash brokerage account taxed?
- All gains and income in a cash brokerage account are taxable in the year realized. Long-term capital gains (held more than 12 months) are taxed at 0%/15%/20% preferential rates. Short-term gains are taxed as ordinary income. Net Investment Income Tax of 3.8% applies above $200,000 MAGI (single) or $250,000 MAGI (MFJ). Broker issues Form 1099-B and Form 1099-DIV annually. The wash-sale rule (IRC Section 1091) disallows losses on re-purchases within 30 days.