What Is a Holding Period?
A holding period is the amount of time theinvestment is held by an investor, or the period between the purchase and sale of a security.In a long position, the holding period refers to the time between an asset's purchase and its sale. In a short options position, the holding period is the time between when a short seller buys back the securities and when the security is delivered to the lender to close the short position.
Key Takeaways
- A holding period is the amount of time theinvestment is held by an investor, or the period between the purchase and sale of a security.
- Holding period is calculated starting on the day after the security's acquisition and continuing until the day of its disposal or sale, the holding period determines tax implications.
- Holding period return is the total return received from holding an asset or portfolio of assets over a specified period of time, generally expressed as a percentage.
- Holding period differences can result in differential tax treatment on an investment.
Understanding Holding Period
The holding period of an investment is used to determine the taxing ofcapital gainsor losses. A long-term holding period is one year or more with no expiration. Any investments that have a holding of less than one year will be short-term holds. The payment of dividends into an account will also have a holding period.
Holding period return is thus thetotal returnreceived from holding an asset orportfolio of assets over a specified period of time, generally expressed as a percentage. Holding period return is calculated on the basis of total returns from the asset or portfolio (income plus changes in value). It is particularly useful for comparing returns between investments held for different periods of time.
How to Calculate a Holding Period
Starting on the day after the security's acquisition and continuing until the day of its disposal or sale, the holding period determines tax implications. For example, Sarah bought 100 shares of stock on Jan. 2, 2016. When determining her holding period, she begins counting on Jan. 3, 2016. The third day of each month after that counts as the start of a new month, regardless of how many days each month contains.
If Sarah sold her stock on December 23, 2016, she would realize a short-term capital gain or capitallossbecause her holding period is less than one year. If she sells her stock on Jan. 3, 2017, she would realize a long-term capital gain or loss because her holding period is more than one year.
Holding period return can therefore be represented by the following formula:
HoldingPeriodReturn=IVIncome+(EOPV−IV)where:EOPV=endofperiodvalueIV=initialvalue
Rules for Holding Periods
When receiving a gift of appreciated stock or other security, the determination of the recipient’s cost basis is by using the donor’s basis. Also, the recipient’s holding period includes the length of thedonor’s holding period. This continuation of holding is called “tacking on” because the recipient’s holding period adds value to the donor’s holding period.In cases wherethe recipient’s basis is determined by the fair market value of the security, such as a gift of stock that decreased in value, the recipient’s holding period starts on the day after receiving the gift.
1 year
The holding period after which the IRS considers an investment a long-term gain (or loss) for tax purposes. Long-term capital gains are taxed at a more favorable rate than short-term gains.
When an investor receives a stock dividend, the holding period for the new shares, or portions of a new share, is the same as for the old shares.Meeting the minimum holding period is the primary requirement for dividends to be designated as qualified. For common stock, the holding must exceed 60 days throughout the 120-day period, which begins 60 days before the ex-dividend date. Preferred stock must have a holding period of at least 90 days during the 180-day period that begins 90 days before the stock's ex-dividend date.
Holding also applies when receiving new stock in a company spun off from the original company in which the investor purchased stock. For example, Paul purchased 100 shares of stock in April 2023. In June 2024, the company declared a two-for-one stock split. Paul then had 200 shares of company stock with the same holding period, starting with the date of purchase in April 2023.
How Long Do You Need to Hold a Stock for Capital Gains?
Under IRS regulations, if you hold a stock for longer than one year, the investment gains are taxed at the long-term capital gains rate of 0, 15, or 20%. If you hold the stock for less than one year, the gains are taxed at the same rate as ordinary income, which can be up to 37%.
How Long Do You Need to Hold a Mutual Fund?
Mutual funds discourage investors from trading frequently, which can cause the fund's expenses to rise. To deter high-frequency trades, many mutual funds have a 30-day rule to prevent new buyers from selling their fund shares immediately. Funds may charge early redemption fees, or they may prohibit traders from making trades for a certain number of days.
What Is the Holding Time for Insider Trades?
SEC Rule 144 governs the sale and issue of stock shares that are not available to the public, such as those issued to corporate directors and insiders. Under this rule, shares in a public company must be held for six months before they can be sold. If the company is private, the holding time is one year.
The Bottom Line
In finance, the holding time or holding period is the length of time an investor can hold a security before selling or disposing of it. Depending on the asset, there are different prescribed holding times for an investor to make the best use of existing regulations.
