Imagine this scenario. You purchased a block of stock shares with the intent of holding those shares as a long term investment. To your good fortune, the market spikes up sharply. You have made a good profit on the investment and you sell it. You come in to have your tax return prepared. You are very happy because you are quick to tell me that you made sure that you had met the long term holding period. You planned the sale to qualify as a long term sale and therefore you would get the very favorable long term capital gain tax rates. You even brought in the confirmations showing the exact date of purchase and the date of sale. The purchase confirmation showed the purchase date to be August 15, 2014. The sale confirmation showed the sale date to be August 16, 2015. You are very happy since you had owned the stock for more than one year – or so you thought. The rest of our meeting was not very pleasant and you discovered you actually had not held the stock long enough to qualify for a long term gain.
In order to avoid the scenario above actually happening to you, let’s talk about what constitutes a long term capital gain versus a short term capital gain. We are entering the last 3 months of the year and are making decisions to sell or hold. Keep in mind that “long term” capital gains get a very favorable tax break. Long term capital gains are taxed at 0%, 15%, or 20%, depending on the tax bracket of your other income. Let’s make sure those decisions are the right ones.
The Internal Revenue Code defines a long term capital gain as an asset you own for MORE THAN one year. Assume the following: the asset is bought on September 25, 2015. The first day of your ownership begins on September 26, 2015. One year is September 26, 2016. More than one year is September 27, 2016. The earliest day you can sell the asset and have it qualify for long term capital gain is September 27, 2016. A sale that occurs prior to September 27, 2016 would be treated as a short term sale and would not receive the advantage of the very favorable long term capital gain tax rates. Take note that it is the trade date that controls and not the settlement date.