Holding Period For Capital Gains
Capital gains tax rates are determined by holding period for the investment. There are two types of capital gains holding periods, short-term and long-term:
- Short-term: capital gains (or losses) from investments held for one year or less. Most short sales are considered short-term by the IRS even if held more than a year - see the heading below on Short Sales.
- Long-term: capital gains (or losses) from investments held for more than one year.
Short-Term Capital Gains
If the date of the sale is one year or less after the date of the purchase, you have a short-term capital gain.
Example:
You bought 100 shares of ABC on May 12, 2009.
You sold the same 100 shares of ABC on May 18, 2009.
This sale results in a Short-Term gain as the holding period was less than 366 days.
Short-term capital gains are taxed at the same rate as ordinary income (like wages and interest income). Remember, it is net gains that are taxed, therefore any losses will offset the gains for the same period. If you are in the highest federal tax bracket and you pay state capital gains tax, it's possible to owe more than 40% of your investment gain in short-term capital gains taxes.
Long-term capital gains on the other hand, are taxed at much lower rates, thus it is important to accurately calculate the holding period for your investments.
Long-Term Capital Gains
If the date of the sale is more than one year (366 days or more) after the date of the purchase, you have a long-term capital gain.
Example:
You bought 100 shares of ABC on May 12, 2008.
You sold the same 100 shares of ABC on May 18, 2009.
This sale results in a Long-Term gain as the holding period was more than 365 days.
The gain realized from selling a long-term holding is taxed at a lower rate than short-term gains. Long-term capital gains are taxed at 15% for all tax brackets other than 10% and 15% which pay an even lower long-term rate of 5%.
Short Sales
In a short sale, the holding period is the time between when a short seller initially borrows an asset from a brokerage, and when he or she sells it back - in other words, the length of time for which the short position is held. Typically a short sale is therefore classified as a short-term holding.
IRS publication 550 states on page 55:
Example. Even though you do not own any stock of the Ace Corporation, you contract to sell 100 shares of it, which you borrow from your broker. After 13 months, when the price of the stock has risen, you buy 100 shares of Ace Corporation stock and immediately deliver them to your broker to close out the short sale. Your loss is a short-term capital loss because your holding period for the delivered property is less than 1 day.
Tax Classification
When figuring your taxes for the year, each gain or loss must be classified as either short-term or long-term.
Sadly, none of the trades listed on your broker provided 1099 will be identified as short- or long-term. That means it is up to you to do this manually, perhaps for hundreds of trades. Who has that kind of time?
TradeLog™ allows you to import an entire year's worth of trades in minutes and run a simple, "IRS ready" short-term and long-term Gains and Losses report.
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Armen Computing Ltd. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.
