What is a holding period?
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A holding period is the length of time between when an asset is purchased and when it is sold. Holding periods are important for investors as they can affect taxes and help determine the average annual return of an investment.
Here’s what you need to know about holding periods, including how they can impact your taxes.
Why does the holding period matter?
The length of the holding period matters for calculating the tax treatment of capital gains or losses.
- For most assets, if they are held for over a year, any resulting gain or loss is considered long-term.
- If the asset is held for a year or less, the gain is considered a short-term gain or loss.
In addition to taxes, the holding period can help you compare annual returns among investments held for different periods of time. To do this, you would calculate the total return, including capital appreciation, any additional income received such as dividends, any additional investments made during the period, as well as any withdrawals. The total return is the ending value of the investment plus other income less the original cost of the investment and any withdrawals.
Total return = (Ending value – beginning value + dividends or interest) / Beginning value * 100
For example, say you purchase 50 shares of Company ABC at $25 per share, for a total of $1,250 (50 shares x $25). Each year you receive dividends of $1 per share. After 10 years, you sell the 50 shares for $40 each, for a total of $2,000. The dividends over the 10 years total $500. Your total return is 100 percent.
With the total return and the holding period you can then figure the annualized return on the investment, helping you compare investments that you’ve held over different time periods. For instance, a 100 percent return earned in two years is much different from a 100 percent return over seven years. The first is a 41.4 percent annualized return, while the second is 10.4 percent – a big difference!
Holding period and taxes
The holding period is used to determine the tax treatment of gains or losses on an investment.
In general, assets held for over a year are subject to long-term capital gains tax rates, which is typically more favorable than the short-term capital gains tax rate. Long-term capital gains are taxed at 0, 15 and 20 percent, depending on your overall income.
Assets held for one year or less are subject to short-term capital gains tax rates. The short-term tax rate is the same as ordinary income tax rates, which range as high as 37 percent. So for most investors, it’s more advantageous to wait to sell assets after a year.
To earn preferential treatment for dividends received, the dividend-paying stock has different holding periods from most other assets. To qualify for the lower tax rate on qualified dividends, most dividend stocks must be held for at least 61 days within a 121-day timeframe that began 60 days before the ex-dividend date.
How to calculate the holding period
Here’s how to calculate the holding period for a few specific types of investments:
How to calculate the holding period for stocks
- For stocks you’ve bought and sold
- The holding period begins the day after you buy the shares and ends on the day you sell the shares.
- For gifted stocks
- If the shares were received as a gift, your holding period includes the holding period of the person who gave you the shares.
- For inherited stocks
- If the shares were inherited, the holding period is automatically considered to be more than one year. This means that when you sell the inherited stock, it will be subject to long-term gains treatment regardless of the actual holding period.
How to calculate the holding period for qualified dividends
Dividends can be classified as qualified or nonqualified for tax purposes, with qualified dividends taxed at more preferential rates. To be considered a qualified dividend, the holding period for the stock must be at least 61 days within a 121-day period starting 60 days before the ex-dividend date.
Qualified dividends may be subject to a 0, 15 or 20 percent tax rate for those with taxable income below a certain threshold. Nonqualified dividends are treated as ordinary income.
How to calculate the holding period for cryptocurrency
If cryptocurrency is held for one year or less before selling or exchanging it, it is considered a short-term capital gain or loss. If it is held for more than one year, it is classified as a long-term capital gain or loss. The holding period for virtual currency starts the day after acquisition and ends on the day of sale or exchange. The fair market value of the virtual currency in U.S. dollars at the time of receipt determines its basis.
Bottom line
The holding period is an important concept to understand in investing since it determines how the investment’s gain or loss is taxed. Knowing how to calculate the holding period can help investors make informed decisions about their investments and maximize their returns.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
