What is a good faith violation, and when can I use cash from a sale?

Every stock trade has two dates. The trade date is when your order fills. The settlement date is when the shares and the cash formally change hands between the two sides of the trade.

Since May 28, 2024, most US securities transactions settle one business day after the trade date, a cycle written as T+1. The SEC adopted the change in February 2023 under Rule 15c6-1, shortening the old two-day cycle (T+2) to reduce the credit, market and liquidity risk that builds up while trades are waiting to settle. Stocks, ETFs, corporate bonds and most mutual funds traded through a broker are on T+1.

Business days are the part people miss. Weekends do not count, and neither do days when banks are closed even if the stock market is open, such as Columbus Day and Veterans Day. A sale on Friday, October 23, 2026 settles on Monday, October 26. A sale on Tuesday, November 10, 2026 settles on Thursday, November 12, because Veterans Day falls in between.

A cash account is the default brokerage account: you pay for everything you buy in full, and the broker lends you nothing. Inside it, your cash comes in two kinds.

• Settled cash is money that has finished arriving: a deposit that has cleared, or the proceeds of a sale whose settlement date has passed. You can spend it on anything and sell what you bought whenever you like.
• Unsettled cash is the proceeds of a sale that has not reached its settlement date yet. Most brokers let you buy with it immediately, which is why the balance on screen looks like ordinary spending money.

Brokers label these differently. You may see "cash available to trade", "settled cash", "cash available to withdraw" or "buying power". In a cash account, the withdrawable figure is usually the settled one, and the to-trade figure usually includes unsettled proceeds. When the two numbers differ, the difference is money still in transit.

A good faith violation (often shortened to GFV) happens when you buy a security in a cash account with unsettled funds and then sell that security before those funds settle. Fidelity defines it in its trading education as buying a security and selling it "before paying for the initial purchase in full with settled funds." Only cash, or the proceeds of securities that were themselves fully paid for, count as settled funds.

The name comes from Regulation T, the Federal Reserve rule that governs credit in brokerage accounts. Section 220.8 lets a broker accept a cash-account purchase without money already in the account if it accepts "in good faith" that you will pay in full before selling. Selling first means the payment never happened in the way the broker accepted on trust.

The term itself is industry practice, and the consequences are set by each broker's policy built on top of Regulation T. The common pattern, spelled out by Fidelity, is that three good faith violations in a rolling 12-month period lead to a 90-calendar-day restriction. Some brokers count differently, so your own broker's cash account agreement is the final word.

You hold $5,000 of stock A and have no other cash. On Monday, October 19, 2026, you sell stock A at 10:00 a.m. for $5,000. Those proceeds settle on Tuesday, October 20.

At 11:00 a.m. on Monday, you buy $5,000 of stock B with the unsettled proceeds. So far, nothing is wrong. Buying with unsettled sale proceeds is permitted at most brokers.

At 2:00 p.m. on Monday, stock B jumps and you sell it. That sale is the good faith violation. You sold stock B before the money that paid for it (the stock A proceeds) had settled.

The same sale on Tuesday, October 20 or later would have been fine. By then the stock A proceeds had settled, stock B was fully paid for, and you were free to sell it.

Same idea, with settled cash at the start

Now you start Monday with $5,000 of settled cash. You buy stock C at 10:00 a.m. and sell it at noon for $5,200. No violation, because stock C was bought with settled money.

At 1:00 p.m. you buy stock D with that $5,200, which is unsettled until Tuesday. If you sell stock D at 3:00 p.m. on Monday, you have a violation on the second round trip, even though the first one was clean. Each purchase is judged by the money that paid for it.

Good faith violations get most of the attention, but two related violations sit beside them, and they are treated more harshly.

Freeriding

Freeriding means buying a security and paying for it with the proceeds of selling that same security, without ever bringing money in. Investor.gov, the SEC's investor education site, puts it plainly: in a cash account, an investor must pay for a purchase before selling it, and buying and selling before paying is freeriding, which is not permitted under the Federal Reserve Board's Regulation T.

Example: you have $0 in the account. On Monday you buy $3,000 of stock E. You send no money. On Wednesday you sell stock E for $3,300 and let the proceeds cover the purchase. You traded with the broker's money and kept the $300.

The consequence comes from Regulation T itself. Section 220.8(c) withdraws "the privilege of delaying payment beyond the trade date" for 90 calendar days after the sale. At Fidelity, a single freeriding violation is enough to trigger it.

Cash liquidation violations

A cash liquidation violation happens when you buy something without enough settled cash to cover it at settlement, then sell other, fully paid holdings after the purchase date to raise the money. You had the assets, but the cash arrived late. Example: with $0 cash, you buy $4,000 of stock F on Monday. On Tuesday, the day it settles, you sell $4,000 of stock G to pay for it. Stock G's proceeds settle Wednesday, one day after you owed the money. Fidelity restricts an account for 90 days after three of these in 12 months.

A restricted cash account is not frozen in the everyday sense. Investor.gov describes the Regulation T freeze this way: during the 90 days you may still purchase securities in the cash account, but you must fully pay for any purchase on the date of the trade.

In practice, that means you can only buy with cash that has already settled before you place the order. You can still sell anything you hold, and sale proceeds still arrive. They simply cannot be reused for a new purchase until they settle. For someone who trades a few times a month, the restriction barely shows. For someone rotating the same money through several trades a week, it slows everything to one round trip every couple of days.

Regulation T also lets a broker apply to its regulator for a waiver of the freeze in exceptional circumstances, and the freeze does not apply when full payment arrives within the payment period and the sale proceeds were not withdrawn first. The payment period is defined in Section 220.2 as the standard settlement cycle plus two business days, so three business days under T+1. Brokers also have discretion to ignore a shortfall of $1,000 or less. None of these is something to plan around, but they explain why the outcome of a single mistake can differ between brokers.

Sale proceeds are not the only unsettled cash. A deposit from your bank by ACH transfer usually takes a few business days to fully clear. Many brokers credit some or all of it as buying power immediately, often called instant deposits or instant buying power, so you can trade on the day you move the money.

Until that transfer clears, a position bought with it has not been paid for with settled funds. Depending on the broker, selling that position before the deposit clears can be counted as a good faith violation, and withdrawing the proceeds can be blocked until the original transfer completes. If the bank transfer is reversed (for insufficient funds, say), the broker can sell positions to cover what it fronted.

Wire transfers generally arrive as settled cash the same day. If you plan to trade actively on newly deposited money, a wire, or simply waiting for the ACH to clear, avoids the question entirely. Your broker's funding page will state how long each deposit type takes to become settled.

Every rule above is a cash account rule. In a margin account, the broker extends credit while trades settle, so buying with unsettled proceeds and selling the new position the same day is normal activity, not a violation. Good faith violations, freeriding and cash liquidation violations do not arise there in the same form.

A margin account trades one set of constraints for another. You are borrowing whenever you spend more than your settled cash, and the broker charges interest on it. Margin accounts have maintenance requirements and can trigger a margin call. Frequent same-day round trips also bring FINRA's pattern day trading rules into play. Opening one to avoid settlement timing is a real decision about borrowing, and our guide to how a margin account works walks through those rules. Retirement accounts such as IRAs are cash accounts by law, so settlement rules apply there no matter what.

1. Before selling, ask what paid for it. If the purchase used proceeds from a sale that has not settled, wait until that sale's settlement date before selling.
2. Count business days, not calendar days. A Friday sale settles Monday. A sale just before a bank holiday settles a day later than you expect.
3. Read the settled cash line, not buying power. In a cash account, buying power often includes money still in transit.
4. Watch for warnings. Most brokers show a warning before an order that would create a violation. Read it rather than clicking through.
5. Keep a settled cash buffer if you trade often. Trades bought with money that was already settled can be sold any time.
6. Treat new ACH deposits as unsettled until your broker shows them as cleared.

A single violation rarely has a lasting cost. Brokers count them over a rolling 12 months, and the first one usually produces only a notice. The trouble starts when the same habit repeats three times before the oldest one ages out.

Assuming the buy is the problem. Buying with unsettled proceeds is allowed almost everywhere. The violation happens at the sale.

Using T+2 timing. Plenty of older articles still describe a two-day cycle. Since May 2024 it has been one business day for most US securities, which works in your favor: money becomes reusable sooner.

Thinking a profit fixes it. Selling the position for more than you paid does not change anything. The rule concerns when the payment settled, not whether the trade made money.

Confusing options and mutual funds with stocks. Listed options also settle T+1, but some mutual funds bought directly from the fund company settle on their own schedule. Check the settlement date on your trade confirmation rather than assuming.

Walnut connects to your brokerage account read-only or with trading permission, shows how each holding has performed against the S&P 500, and gives a keep, trim or exit read on it. Any trade goes through your own broker, only with your approval, and settles on your broker's normal cycle, so the cash account rules above apply exactly as they would if you placed it yourself. Walnut does not track settled versus unsettled cash or warn about good faith violations; your broker's balance screen and order warnings are the place to check. Walnut is informational and is not an investment adviser.

The T+1 settlement cycle and its May 28, 2024 compliance date come from the SEC's February 2023 adoption release. Cash account rules, the 90-day freeze and the payment period are in Federal Reserve Regulation T, 12 CFR Part 220 (Sections 220.2 and 220.8). The freeriding definition is from Investor.gov. The three-in-12-months thresholds are Fidelity's published policy in Avoiding cash account trading violations; other brokers may count differently. This guide is educational and is not personalized investment advice.