A holding period of a particular investment or asset is the amount of time your client has owned it or possessed it. There is the short-term holding period, for investments your client has had for less than a year, and the long-term holding period, for investments held over a year. The IRS uses the holding period to determine your clients gains and losses. The beginning and end date of the holding period is determined by the first of the month instead of relying on the math of 365 days. This means that if your client bought something on July 1st 1999, then sold the asset on July 1st 2000, it would be considered a short-term gain or loss. However, if the investment was sold on July 2nd, it would be treated as long term gain or loss, and the tax rate would be 20% on the gain instead of 39.6% for short-term gains or losses.
Following are some holding periods for different assets and investments:
- The holding period for securities begin on the day after the trading date and ends on the day your client sells them. These are the days of the transactions, not the settlement days.
- If your client swaps an old investment asset with a new one in an exchange, the holding period begins on the day your client bought the original investment asset. For example, your client exchanges their Mercedes for a Jaguar. Your client bought the Mercedes four years ago. The holding period for the Jaguar now is the day your client bought the Mercedes.
- The holding period of a real estate property begins the day after possession of the property is taken or the day your client receives the title to the property.
- If your client receives a gift that has appreciated in value since the owner bought it, the holding period begins on the day the owner bought the asset. If the gift has depreciated in value, your clients holding period begins on the day he or she receives it.
- The holding period of an inherited property is long term regardless of how long your client has held it.
- Holding periods for stocks that have been split or stocks of companies that spin off into other companies that receive stocks from are all started on the same date that your client originally bought stock in that company. For example, your client bought stock in the company in 1991 and ten years later, the company branches off into several smaller companies. Any stock your client receives from these smaller companies has a holding period of ten years.