Short-Term vs. Long-Term Capital Gains

The holding period of a capital asset determines whether any resulting gain or loss is classified as short-term or long-term. This classification has significant tax consequences because short-term gains are taxed at ordinary income rates while long-term gains receive preferential tax treatment.

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Basic Holding Period Rules

The One-Year Threshold

The IRS uses a simple but strict one-year threshold to classify capital gains:

• Short-term: Property held for one year or less
• Long-term: Property held for more than one year

Counting the Holding Period

When calculating the holding period, follow these rules:

1. Start date: Count from the day after acquisition (the acquisition date itself is NOT counted)
2. End date: Include the day of disposition
3. Critical timing: Selling on the same calendar date of the following year means you held the asset for exactly one year - this is still short-term!

Example: You purchase stock on March 15, 2024. Your holding period begins on March 16, 2024.

• Sell on March 15, 2025 = Short-term (exactly 1 year = still short-term)
• Sell on March 16, 2025 = Long-term (more than 1 year)

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Trade Date vs. Settlement Date

For securities transactions, the trade date (the date you execute the buy or sell order) controls for tax purposes - NOT the settlement date.

Important: Since May 28, 2024, the standard settlement period is T+1 (one business day after trade date). However, this does not affect the holding period calculation - always use the trade date.

Real estate exception: For real property, use the closing date as the acquisition/disposition date.

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Special Holding Period Rules

Inherited Property: Automatic Long-Term Treatment

When you inherit property from a decedent, the IRS provides a significant benefit:

• The property is automatically treated as long-term regardless of how long the decedent held it or how long you hold it before selling
• This rule applies even if you sell the inherited property the day after receiving it
• Report inherited property dispositions as long-term gains or losses on Schedule D

Gifted Property: Tacking On the Donor's Holding Period

For property received as a gift, special rules apply based on whether you have a gain or loss:

For gains (your basis = donor's basis):

• You add the donor's holding period to your own holding period
• This is called "tacking" or the "tack-on holding period"

For losses (when FMV at gift date is less than donor's basis, and you use FMV as your basis):

• You cannot tack on the donor's holding period
• Your holding period begins the day after you receive the gift

Example: Your grandmother held stock for 8 months before gifting it to you. If you sell it 5 months later at a gain, your total holding period is 13 months = long-term.

Stock Splits and Stock Dividends

When you receive stock splits or stock dividends:

• Use the original acquisition date of the underlying shares
• The holding period carries over from the original shares

Wash Sales: Holding Period Carryover

When a wash sale occurs (you sell a security at a loss and repurchase substantially identical securities within 30 days before or after):

• The holding period of the original stock is added to the replacement stock's holding period
• This can help you qualify for long-term treatment faster

Example: You held Stock A for 9 months, triggered a wash sale, and then held the replacement shares for 4 months. Total holding period = 13 months = long-term.

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2024 Tax Rate Differences

Short-Term Capital Gains Rates (Ordinary Income)

Short-term capital gains are taxed as ordinary income at your marginal tax rate:

Long-Term Capital Gains Rates (Preferential)

Long-term capital gains qualify for preferential rates:

Key insight: The difference between short-term (up to 37%) and long-term (maximum 20%) rates can result in tax savings of up to 17 percentage points on the same gain!

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Special Asset Classes

Collectibles: Maximum 28% Rate

Long-term gains on collectibles are taxed at a maximum rate of 28% (not 0%, 15%, or 20%). Collectibles include:

• Art, antiques, and stamps
• Coins and precious metals (gold, silver, platinum)
• Gems and jewelry
• Rare wines and other alcoholic beverages
• Rugs and other historic objects

Note: If your ordinary income tax bracket is below 28%, you pay your ordinary rate. The 28% is a maximum, not a flat rate.

Section 1202 Qualified Small Business Stock (QSBS)

Section 1202 provides significant exclusions for gains on qualified small business stock:

• Stock must be acquired at original issuance from a C corporation
• Corporation must have gross assets of $50 million or less at time of issuance
• Stock must be held for more than 5 years

Exclusion percentages based on acquisition date:

For stock acquired after September 27, 2010, the entire gain may be excluded (up to the greater of $10 million or 10 times the taxpayer's basis in the stock).

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Net Investment Income Tax (NIIT)

The 3.8% Net Investment Income Tax applies in addition to regular capital gains taxes when modified adjusted gross income (MAGI) exceeds threshold amounts.

2024 NIIT Thresholds

Critical point: These thresholds are NOT indexed for inflation and have remained unchanged since 2013.

Maximum Effective Tax Rates

When NIIT applies, the maximum effective tax rates become:

• Regular long-term gains: 20% + 3.8% = 23.8%
• Collectibles: 28% + 3.8% = 31.8%
• Short-term gains: 37% + 3.8% = 40.8%

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Summary: Holding Period Quick Reference