Holding Periods for Capital Assets
Revised By: Whitney Ibarra, C.P.A.
The Henssler Financial Group Position Paper
The holding period makes the greatest difference in determining whether an asset is entitled to short-term or long-term capital gain treatment. At today's rates, that can be the difference between being taxed at the highest ordinary income tax rate of 35% or the long-term capital gain rate of 15%. An investment strategy should not postpone good economic decisions to benefit from the 15% long-term capital gain rate; however, it should consider postponing action when a sell decision is made just short of the one year and a day holding period necessary for long-term capital gain. By the same token, a decision to sell an asset at a loss may involve timing the sale prior to the one year and one day holding period to take advantage of short-term capital loss treatment.
The basic rules include the following:
Long- and Short-Term Capital Gain
The capital gains rates of 15% or 5% (for those in the 15% regular income tax bracket) apply for the sale of capital assets. In general, this includes all investment assets. For individuals it includes assets held for business income purposes. Assets must be held for one year and one day to be entitled to long-term capital gain treatment. This requires keeping track of exactly when a property is purchased and when the property is sold, not the date the sales contract is executed. For stock purchases, it is the trade date that counts, not the settlement date.Special Rates for 2008-2010
Under a 2003 tax law, Congress carved out a capital gains tax rate of 0% for lower income taxpayers for 2008. For those individuals in the two lowest ordinary-income tax brackets — the 10% and 15% brackets — the rate drops from 5% to 0%. A tax law passed in 2006 extended these capital gains breaks through 2010.
Determining Holding Period
In determining how long an asset was held, the taxpayer begins counting on the date after the day the property was acquired. The same date of each following month is the beginning of a new month regardless of the number of days in the preceding month. For example, if property was acquired on February 1, 2007, the taxpayer's holding period is considered to have begun on February 2, 2007. The date the asset is disposed of is part of the holding period.
Wash Sales
Wash sales are sales of stock or securities in which losses are realized, but not recognized, because the seller acquires substantially identical stock or securities within 30 days before or after the sale. Where there has been a wash sale of securities, the holding period of the securities acquired includes the period for which the taxpayer held those securities on which the loss was not deductible. Disallowed losses are reflected in basis of acquired stock. Nonrecognition applies only to losses; gains are recognized in full.
Options
To determine whether a capital gain on stock is long-term or short-term, you begin with the date after the option is exercised, not the date the option is granted.
"Carryover" Holding Period
In determining the holding period for long-term capital gain and loss purposes, the holding period is "tacked on" to another person's holding period in the case of gifts or property received in a divorce. Additional rules when business assets are distributed to owners or partners may also apply.
If you have any further questions in regard to how tax holding period rules may apply to your particular situation, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.