diff --git a/ledger-sort.el b/ledger-sort.el
index 1601a853..6fa128c5 100644
--- a/ledger-sort.el
+++ b/ledger-sort.el
@@ -59,13 +59,41 @@
   (beginning-of-line)
   (insert "\n; Ledger-mode: End sort\n\n"))
 
+(defconst ledger-sort--year-directive-regex
+  "^\\(?:Y\\|year\\)\\s-+\\([0-9]+\\)\\s-*$"
+  "Regex matching a `year NNNN' or `Y NNNN' directive at the start of a line.
+The year number is captured in group 1.")
+
+(defun ledger-sort--preceding-year ()
+  "Return the year from the most recent `year NNNN' or `Y NNNN' directive.
+Searches backward from the start of the current line, ignoring any
+restriction so that directives above a narrowed sort region are still
+consulted.  Returns a number, or nil if no such directive exists."
+  (save-excursion
+    (save-restriction
+      (widen)
+      (beginning-of-line)
+      (when (re-search-backward ledger-sort--year-directive-regex nil t)
+        (string-to-number (match-string 1))))))
+
 (defun ledger-sort-startkey ()
-  "Return a numeric sort key based on the date of the xact beginning at point."
+  "Return a numeric sort key based on the date of the xact beginning at point.
+Dates with a full four-digit year are parsed directly.  Short dates of the
+form M/D or MM/DD are interpreted relative to the most recent `year NNNN'
+directive preceding the current transaction, falling back to the current
+calendar year if no such directive exists."
   ;; Can use `time-convert' to return an integer instead of a floating-point
   ;; number, starting in Emacs 27.
   (float-time
-   (ledger-parse-iso-date
-    (buffer-substring-no-properties (point) (+ 10 (point))))))
+   (cond
+    ((looking-at ledger-iso-date-regexp)
+     (ledger-parse-iso-date (match-string 0)))
+    ((looking-at "\\([0-9]\\{1,2\\}\\)[-/]\\([0-9]\\{1,2\\}\\)\\(?:[^-/0-9]\\|$\\)")
+     (let ((month (string-to-number (match-string 1)))
+           (day   (string-to-number (match-string 2)))
+           (year  (or (ledger-sort--preceding-year)
+                      (nth 5 (decode-time)))))
+       (encode-time 0 0 0 day month year))))))
 
 (defun ledger-sort-region (beg end)
   "Sort the region from BEG to END in chronological order."
diff --git a/test/sort-test.el b/test/sort-test.el
index 83a8c69c..7cb2cae8 100644
--- a/test/sort-test.el
+++ b/test/sort-test.el
@@ -211,6 +211,146 @@ http://bugs.ledger-cli.org/show_bug.cgi?id=260"
       (should (< first-pos mid-pos)))))
 
 
+(ert-deftest ledger-sort/test-1068-year-directive ()
+  "Regress test for Bug 1068
+https://github.com/ledger/ledger/issues/1068
+
+Dates lacking a year component should be interpreted relative to the
+preceding `year NNNN' directive when sorting."
+  :tags '(sort regress)
+
+  (ledger-tests-with-temp-file
+      "year 2040
+
+07/17 Payee B
+    Expenses:B                                $20.00
+    Assets:Cash
+
+2040/07/15 Payee A
+    Expenses:A                                $10.00
+    Assets:Cash
+"
+    (ledger-sort-buffer)
+    (should (equal (buffer-string)
+                   "year 2040
+
+2040/07/15 Payee A
+    Expenses:A                                $10.00
+    Assets:Cash
+
+07/17 Payee B
+    Expenses:B                                $20.00
+    Assets:Cash
+"))))
+
+
+(ert-deftest ledger-sort/test-1068-Y-directive ()
+  "Regress test for Bug 1068
+https://github.com/ledger/ledger/issues/1068
+
+The `Y NNNN' form of the year directive should also be honored."
+  :tags '(sort regress)
+
+  (ledger-tests-with-temp-file
+      "Y 2040
+
+07/17 Payee B
+    Expenses:B                                $20.00
+    Assets:Cash
+
+2040/07/15 Payee A
+    Expenses:A                                $10.00
+    Assets:Cash
+"
+    (ledger-sort-buffer)
+    (should (equal (buffer-string)
+                   "Y 2040
+
+2040/07/15 Payee A
+    Expenses:A                                $10.00
+    Assets:Cash
+
+07/17 Payee B
+    Expenses:B                                $20.00
+    Assets:Cash
+"))))
+
+
+(ert-deftest ledger-sort/test-1068-unpadded-dates ()
+  "Regress test for Bug 1068
+https://github.com/ledger/ledger/issues/1068
+
+Dates written without leading zeros (e.g. 2015/5/7) should sort
+chronologically, not lexicographically."
+  :tags '(sort regress)
+
+  (ledger-tests-with-temp-file
+      "2015/5/10 Payee A
+    Expenses:A                                $10.00
+    Assets:Cash
+
+2015/5/7 Payee B
+    Expenses:B                                $20.00
+    Assets:Cash
+"
+    (ledger-sort-buffer)
+    (should (equal (buffer-string)
+                   "2015/5/7 Payee B
+    Expenses:B                                $20.00
+    Assets:Cash
+
+2015/5/10 Payee A
+    Expenses:A                                $10.00
+    Assets:Cash
+"))))
+
+
+(ert-deftest ledger-sort/test-1068-year-directive-above-region ()
+  "Regress test for Bug 1068
+https://github.com/ledger/ledger/issues/1068
+
+A `year NNNN' directive preceding the sort region should still apply
+when only a sub-region is sorted (so narrowing does not hide it)."
+  :tags '(sort regress)
+
+  (ledger-tests-with-temp-file
+      "year 2040
+
+2040/01/01 Prelude
+    Expenses:Foo                              $1.00
+    Assets:Cash
+
+07/17 Payee B
+    Expenses:B                                $20.00
+    Assets:Cash
+
+03/05 Payee A
+    Expenses:A                                $10.00
+    Assets:Cash
+"
+    ;; Sort only the last two transactions (below the year directive).
+    (goto-char (point-min))
+    (search-forward "07/17")
+    (beginning-of-line)
+    (let ((region-start (point)))
+      (ledger-sort-region region-start (point-max)))
+    (should (equal (buffer-string)
+                   "year 2040
+
+2040/01/01 Prelude
+    Expenses:Foo                              $1.00
+    Assets:Cash
+
+03/05 Payee A
+    Expenses:A                                $10.00
+    Assets:Cash
+
+07/17 Payee B
+    Expenses:B                                $20.00
+    Assets:Cash
+"))))
+
+
 (provide 'sort-test)
 
 ;;; sort-test.el ends here