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 37% or the maximum long-term capital gain rate of 20%. An investment strategy should not postpone good economic decisions to benefit from the maximum 20% 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 before 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
Long-term capital gains are taxed at 0% for those with taxable income below $39,375 (Single Filers) or $78,750 (married filing jointly); 15% (for those with taxable income at or above $39,357 (Single) $78,750 (MFJ), and 20% for those with taxable income above $434,550 (Single) or $488,850 (MJF). To qualify for long-term capital gain treatment, assets must be held for at least a year and one day before being sold. In general, this includes all investment assets. For individuals, it includes assets held for business income purposes. 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. If the asset is held for less than 12 months, then the gain is considered short term and taxed at ordinary income tax rates at whatever tax bracket the taxpayer is in that particular year.
Other unique circumstances trigger different capital gains rates. For example, a 25% rate applies to part of the gain from selling real estate that you depreciated to prevent you from getting a double tax break. The IRS first wants to recapture some of the tax breaks received via depreciation throughout the years on assets known as Section 1250 property. There is also a 28% capital gains rate if you realized a gain from qualified small-business stock that you held more than five years. Generally, you can exclude one-half of your gain from income, and the remainder is taxed at a 28% rate.
If your gains come from collectibles rather than a business sale, you’ll also pay the 28% rate. This includes proceeds from the sale of: art, antiques, gems, stamps, coins, precious metals, wine, or brandy collections.
Higher-income taxpayers should also be aware that they may be subject to an additional 3.8% Medicare unearned income tax on net investment income (unearned income includes capital gains) if their adjusted gross income exceeds $200,000 (Single) or $250,000 (MFJ).
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 the property was acquired on February 1, 2019, the taxpayer’s holding period is considered to have begun on February 2, 2019. The date the asset is disposed of is part of the holding period.
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 the basis of acquired stock. Nonrecognition applies only to losses; gains are recognized in full.
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 questions regarding what holding periods to use for your assets, the experts at Henssler Financial will be glad to help: