A holding period is the length of time a taxpayer is treated as having owned property. For a capital asset it decides one thing above all: whether the gain or loss on disposal is short term or long term, and that label sets the rate.
The period is not always the same as how long the taxpayer actually held the thing. Several rules add somebody else’s ownership to it, and one rule treats a period as long term no matter how short it was.
The Line Is One Year, and the Word Is More Than
Four definitions carry the whole rule, and they are written as matched pairs.
Short term capital gain means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income. Long term capital gain means gain from the sale or exchange of a capital asset held for more than 1 year, on the same condition (26 U.S.C. 1222(1) and (3)).
The loss definitions mirror them with one word changed. Short term capital loss and long term capital loss use the same not more than 1 year and more than 1 year lines, but the trailing condition is that the loss is taken into account in computing taxable income rather than gross income (26 U.S.C. 1222(2) and (4)).
Exactly one year is short term. The long term definition requires more than 1 year, so a sale on the first anniversary of the purchase is on the wrong side of the line.
How the Days Are Counted
The IRS states the count in one sentence. To figure the holding period, begin counting on the day after you received the property and include the day you disposed of it (IRS, Instructions for Form 8949).
That is why the anniversary matters. Counting from the day after acquisition means the one year mark falls on the anniversary itself, and a disposal on that date has been held for exactly one year rather than more than one.
The same instructions carry a warning that is easy to miss. Taxpayers who hold certain partnership interests in connection with the performance of services may be subject to different holding period rules (IRS, Instructions for Form 8949).
When Somebody Else’s Period Is Added to Yours
Tacking is the rule that a holding period can carry over with basis, and section 1223 sets out where.
Property received in an exchange. In determining the period for which the taxpayer has held property received in an exchange, the period for which he held the property exchanged is included if two things hold: under the chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges, the property exchanged at the time of the exchange was a capital asset as defined in section 1221 or property described in section 1231 (26 U.S.C. 1223(1)). Two deeming rules sit inside the same paragraph: an involuntary conversion described in section 1033 is considered an exchange of the property converted for the property acquired, and a distribution to which section 355, or so much of section 356 as relates to section 355, applies is treated as an exchange.
Where this bites in practice is a like kind exchange, because the replacement property carries the relinquished property’s basis: if property was acquired on an exchange described in section 1031, the basis is the same as that of the property exchanged, decreased by any money received and increased by gain or decreased by loss recognized on the exchange (26 U.S.C. 1031(d)). The rest of the mechanics are in 1031 exchange.
Property that carries another person’s basis. In determining the period for which the taxpayer has held property however acquired, the period for which the property was held by any other person is included, if under the chapter the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of that other person (26 U.S.C. 1223(2)). A gift is the everyday case.
Stock bought back after a wash sale. In determining the period for which the taxpayer has held stock or securities whose acquisition, or the contract or option to acquire which, made a loss nondeductible under section 1091, the period for which he held the stock or securities whose loss was not deductible is included (26 U.S.C. 1223(3)). The disallowed loss and the old holding period both move to the replacement position.
Stock rights from a distribution. In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of that stock or those rights is determined under section 307, the period for which he held the stock in the distributing corporation before the receipt is included, under regulations prescribed by the Secretary (26 U.S.C. 1223(4)).
Inherited Property Is Long Term by Rule
The one case where a short period is treated as a long one.
Where a person acquires property from a decedent, or property passed to them from a decedent within the meaning of section 1014(b), and the basis of that property in their hands is determined under section 1014, and the property is sold or otherwise disposed of by them within 1 year after the decedent’s death, that person is considered to have held the property for more than 1 year (26 U.S.C. 1223(9)). Both conditions have to hold; the rule is written on the basis rule, not on inheritance in the ordinary sense.
The filing instruction says the same thing more bluntly. Generally, if you disposed of property that you acquired by inheritance, report the disposition as a long term gain or loss regardless of how long you held the property (IRS, Instructions for Form 8949). What the basis of that property is comes from step up basis.
Where Else the Period Decides Something
The one year line is the famous one, and it is not the only clock a preparer meets.
Qualified dividends carry a holding period test of their own that has nothing to do with the capital gain line, and where that test fails is worked through in ordinary dividends. Business property has a separate regime with its own period, in section 1231. And where multiple lots of the same security are held, each lot carries its own period, which is why the identification made at the time of sale matters and why the specific identification method is written the way it is.
One place where a holding period is NOT the test is worth naming, because the assumption is common. The classification of a security as trading, available for sale or held to maturity turns on management’s intent and on the standard’s own categories rather than on how long the security has been held, which trading securities sets out.
Common Questions
How long property is treated as owned for tax purposes. For a capital asset it is measured against a single line: not more than 1 year is short term, more than 1 year is long term (26 U.S.C. 1222).
Start the count on the day after the property was received and include the day it was disposed of (IRS, Instructions for Form 8949). Then check whether any of the section 1223 tacking rules add a period held by the taxpayer earlier or by somebody else, because the answer changes the character of the whole gain rather than part of it (26 U.S.C. 1223).
Not always, and the test is basis rather than ownership. Wherever the property takes the same basis in whole or in part as it had in the transferor’s hands, the transferor’s period is included in the transferee’s (26 U.S.C. 1223(2)). Where basis is instead determined afresh, the clock starts again.
In the split between the two parts of Form 8949. Short term transactions are reported on Part I and long term transactions on Part II (IRS, Instructions for Form 8949), so the holding period decides which half of the form a disposal lands in before any amount is entered. How the amounts on it are figured is in capital loss and realize gains.
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