How is the holding period for capital gains tax determined?

Using holding period to determine whether capital gains are long term or short term

The holding period is used to determine whether capital gains on sale of capital assets are long term capital gains or short term capital gains. The same applies to capital losses.

• Long term capital gains are taxed at long term capital gains tax rates.
• Short term capital gains are taxed at short term capital gains tax rates.
• Long term capital gains tax rates are of course more favorable than short term capital gains tax rates.

Definition of long term capital gains

If the capital asset is held for more than a year, then the holding period is long term and capital gains from these capital assets are considered long term capital gains.

Definition of short term capital gains

Likewise, if the capital asset is held for one year or less than one year, then the holding period is short term and the capital gains from the sale of these capital assets are considered short term capital gains.

When does the holding period for capital gains begin?

The holding period begins on the date after the capital asset was acquired and ends on the date the capital asset is sold. The holding period for securities traded on an exchange begins the day after the trade date.

Example of how a holding period is calculated for capital gains tax purposes

For example, if a stock is purchased on April 4, then the holding period begins on April 5. On April 5 of the following year, the stock becomes long term. If the investor sells the stock before April 5 of the following year, then the investor would realize short term capital gains or capital loss. If the investor sells the stock after April 5 of the following year, the investor would realize long term capital gains or capital loss.

Special rules apply to measuring from month end.