Holding Periods For Property
Different tax rates apply to short-term and long-term capital gains. However, tax law provides specific rules as to how long an asset is held. The holding period of an asset is generally the time the taxpayer has retained ownership of the asset. Holding periods are usually measured in months and a fractional month. The beginning of the holding period is generally the day after property is acquired and the number of months that the property is held is determined by the specific day of the month, regardless of how many days are in the month. For instance, if you acquire property on August 1, then your holding period begins on August 2, and the holding period is increased by one month on the 2nd day of each month.
However, if you buy an asset on the last day of the month, then the holding period increases by 1 month on the last day of each month even when the months have a different number of days. So, for instance, if you buy an asset on January 31, then the holding period for the asset is 1 month on February 28, or, if it is a leap year, February 29, and 2 months on March 31.
The last day of the holding period is when the asset is sold.
Holding Period for Securities
Security transactions have different rules for specific types of securities. For stocks that are sold at a public exchange, the holding period begins on the day after the trade date, even though stock sales generally don't settle until the 3rd business day after the trade date. The holding period ends on the day that the stock is sold. If shares of the stock are purchased at different times, and the shares that are sold are not identified as to when they were purchased, then tax law assumes a FIFO (first-in, first-out) method of measuring the holding periods.
Example: you purchase 100 shares of IBM in January 2000; you purchase 200 shares of IBM in March 2005; and you purchase another 300 shares in September, 2009. Subsequently, you sell 300 shares in September, 2020. Unless you identified the particular shares that you sold, tax law assumes that the 300 shares sold were the 100 shares you bought in January 2000 and the 200 shares you bought in March, 2005.
A subscription is an agreement with a corporation to buy its newly issued securities. If only the taxpayer is bound by the agreement, then the holding period begins on the day after the stock is issued. If the company is also bound, then the subscription date begins the day after the corporation accepts the subscription.
Sometimes, a corporation will issue stock rights to its shareholders to provide them with the opportunity to maintain their proportionate ownership of the corporation. For the holder of the stock right, the holding period for the stock begins when the stock right is exercised.
Generally, when an employee exercises an employee stock option, the holding period begins the day after the option is exercised.
If the IRS determines that a stock has been subject to wash sale rules, then the holding period of the new stock began when the taxpayer first acquired the old stock.
Stock acquired from the conversion of bonds or preferred stock includes the holding periods of the convertible securities. However, if some of the stock was purchased with cash, then the holding rules for the purchased stock apply to that portion of the stock that was paid with cash, which is the day after the purchase.
When a convertible bond or preferred stock is converted into the common stock of the issuer, the transaction is not taxable. So if you buy convertible bonds for $1,000 on January 3, then paid $200 to convert the bonds into stock on September 29, then the holding period of the stock attributable to the conversion of the bonds begins on January 4, when the holding period of the convertible bond began, which is the day after the trade date; the holding period that is allocable to the purchase price began on September 30, the day after the conversion.
A stock dividend is a dividend paid to shareholders of a corporation as shares or fractional shares of stock in lieu of a cash distribution. If the stock dividend is taxable, then the holding period begins on the date of distribution. If the stock dividends are tax-free or if the stock splits, then the holding period began on the day after the original purchase date of the stock.
For property acquired by exercising an option, the holding period begins the day after the option is exercised.
The holding period of United States treasury notes and bonds that were sold at auction is the date that the Secretary of Treasury gives notification of the successful bidders. The holding period of United States treasury notes that were from a subscription begins on the date that the subscription was submitted.
If you buy a commodity futures contract and later takes delivery of the commodity, then the holding period includes the time that the futures contract was held, which is the day after the futures contract was purchased.
Holding Period for Other Types of Assets
The holding period of acquired real estate begins the day after the acquisition date, which is the earlier of the date when title passes to the taxpayer or when he assumed the legal bundle of rights associated with the ownership of the real estate. State law determines when the title of real estate actually passes to the new owner.
The holding period for real estate ends on the day of sale. However, the gain cannot be claimed until the proceeds are actually received, unless the taxpayer elects not to accept the transaction as an installment sale. If the sale resulted in a loss, the losses are reported in the tax year of the disposition.
The holding period of gifted property includes the holding periods of both the donor and donee. The donee's tax basis of the property is also the same as the donor's.
Inherited property is automatically deemed to be a long-term capital gain or loss. So not only do the beneficiaries receive the property tax-free, but when they sell it, the sales are only subject to the usually lower long-term capital gains tax. Since the wealthy inherit most property, they are the main beneficiaries of this largesse from Congress. Inherited property receives a stepped-up basis, meaning that the beneficiaries' tax basis in the property is the fair market value of the property at the time of the decedent's death. However, if the trustee or executor purchased property to give to a beneficiary, then the beneficiary's holding period is the day after the property was purchased.
The holding period of property distributed to the taxpayer from a partnership includes the holding period of both the partnership and the taxpayer, except if it was inventory that was sold within 5 years of distribution.
When a change of ownership occurs by force of law, theft, or casualty — an involuntary conversion — then the holding period includes the holding periods of the old owner and the new owner, unless the new owner elects to defer the tax; otherwise, the new holding period begins when the new owner acquires the property.