Holding Period

What is a 'Holding Period'

A holding period is the real or expected period of time during which an investment is attributable to a particular investor. In a long position, the holding period refers to the time between an asset's purchase and its sale. In a short sale, 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; in other words, holding period is one day.

BREAKING DOWN 'Holding Period'

The holding period of an investment is used to determine how the capital gain or loss should be taxed because long-term investments tend to be taxed at a lower rate than short-term investments. An investment has a long-term holding period when being held longer than one year.

Calculating a Holding Period

When calculating a security’s holding period, an investor begins counting the day after the date he acquired the security and stops counting on the day he disposed of it. For example, Sarah bought 100 shares of stock on Jan. 2, 2014. When determining her holding period, she begins counting on Jan. 3, 2014. The third day of each month thereafter counts as the start of a new month, regardless of how many days each month contains.

If Sarah sells her stock on Jan. 2, 2015, her holding period is less than one year, and she realizes a short-term capital gain or loss. If she sells her stock on Jan. 3, 2015, her holding period is one year and one day, and she realizes a long-term capital gain or loss.

Different Rules Defining Holding Periods

When receiving a gift of appreciated stock or other securities and the recipient’s cost basis is determined by using the donor’s basis, the recipient’s holding period includes the donor’s holding period. This is called “tacking on” because the recipient’s holding period adds value to the donor’s holding period. However, if the 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.

When an investor receives a stock dividend, the holding period for the new shares is the same as for the old shares. This 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 2014. In June 2015, 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 2014.