What Is a Cash Transaction Defined How They Work and Example
What Is a Cash Transaction?
A cash transaction is an immediate payment of cash for the purchase of an asset. It differs from other transactions that involve delayed delivery or delayed payment, such as forward contracts, futures contracts, credit transactions, and margin transactions.
Key Takeaways:
– A cash transaction is the immediate payment of cash for the purchase of an asset.
– Some market stock transactions are considered cash transactions, despite settlement taking a few days.
– A futures contract is not considered a cash transaction.
Understanding a Cash Transaction
A cash transaction involves an immediate cash payment in exchange for an item. Market stock transactions can be considered cash transactions, as they happen close to instantly at the current price. Although the trade may not settle for a few days, money and shares are exchanged.
In contrast, a futures contract is not a cash transaction. The exchange of money and the delivery of the item do not happen immediately. Using a credit card for a purchase is also not a cash transaction, as payment is made later with the credit card bill.
Under some definitions, all aspects of a cash transaction, including payment delivery, must be finalized on the trade date.
Example of a Cash Transaction
For example, someone uses a debit card to buy an apple in a store. The payment is immediately deducted from their bank account, making it a cash transaction. If a credit card was used, no immediate payment would occur, so it would not be a cash transaction. Payment for the apple would only happen when the credit card bill is paid.
Cash Transactions and the Internal Revenue Service (IRS)
Federal law requires reporting cash transactions over $10,000 to the IRS using Form 8300. Cash includes coins, currency, cashier’s checks, bank drafts, traveler’s checks, or money orders with a face amount of $10,000 or less.
Reporting must be done if cash is received as a lump sum, in multiple payments within 24 hours, as a single transaction within 12 months, or in multiple transactions within 12 months.
Form 8300 must be filed within 15 days after receiving the cash.
