Holding period rules for preferential capital gains
What a difference a day makes! We've all heard that expression more often than we care
to remember. But when it comes to selling appreciated-in-value capital assets such as
stocks, the expression isn't a cliché. One less day of ownership can be the difference
between having your gain taxed at your regular tax rate (which can be as high as 35%)
instead of at the preferential 15% top tax rate that applies to long-term capital gain from
most capital assets (and a 5% capital gains rate for those who would pay regular tax at a
rate below 25% on the gain if it were treated as ordinary income instead of capital gain).
The tax term involved is called the holding period, the minimum period of time you must
hold a capital asset for gain to be favorably taxed as long-term capital gain.
Here's an introduction to some of the more common holding period rules that apply to
capital assets. It will help you avoid making a tax mistake that can't be undone once your
trade is made. Keep in mind, however, that the tax payable on your gain is only one of
the factors to take into account in deciding when to sell a capital asset. For example, if
you expect a stock's value to decline substantially before the long-term holding period is
met, you may very well be better off by selling that stock immediately and paying tax at
the higher rate for short-term gains.
General holding period rule. To yield “long term” capital gain, an asset must be held
for more than one year, in other words, for at least a year and a day. The holding period
begins on the day after you buy an asset, and ends on the day you sell it. For example,
suppose you bought stock on Jan. 3 of Year 1. Your holding period began on Jan. 4 (the
day after you bought). If you sell at a profit on or after Jan. 4 of Year 2, your gain will be
long-term capital gain. If you sell on Jan. 3, Year 2 (or sooner), any gain will be short-
term, taxed at the same rate as ordinary income. Keep in mind that