The holding period makes the greatest difference in determining whether an asset is entitled to short-term or long-term capital gain treatment. At today’s rates, that can be the difference between being taxed at the highest ordinary income tax rate of 37 percent or the maximum long-term capital gain rate of 20 percent.
Long-term capital gains are taxed at 0 percent for those with taxable income below $39,375 (Single Filers) or $78,750 (married filing jointly); 15 percent for those with taxable income at or above $39,376 (Single) or $78,751 (MFJ), and 20 percent for those with taxable income above $434,550 (Single) or $488,850 (MJF). To qualify for long-term capital gain treatment, assets must be held for at least a year and one day before being sold. In general, this includes all investment assets. For stock purchases, it is the trade date that counts, not the settlement date. If you held your asset for 12 months or less, then your gain is considered short term and taxed at your ordinary income tax rate for that particular year.
Other unique circumstances trigger different capital gains rates. For example, a 25 percent rate applies to part of the gain from selling real estate that you depreciated to prevent you from getting a double tax break. The IRS wants to recapture some of the tax breaks received via depreciation throughout the years on assets known as Section 1250 property. There is also a 28 percent capital gains rate if you realized a gain from qualified small-business stock that you held more than five years. Generally, you can exclude one-half of your gain from income, and the remainder is taxed at a 28 percent rate.
If your gains come from collectibles rather than a business sale, you’ll also pay the 28 percent rate. This includes proceeds from the sale of: art, antiques, gems, stamps, coins, precious metals, wine, or brandy collections.
Higher-income taxpayers should also be aware that they may be subject to an additional 3.8 percent Medicare unearned income tax on net investment income (unearned income includes capital gains) if adjusted gross income exceeds $200,000 (Single) or $250,000 (MFJ).
In determining how long an asset was held, you begin counting on the date after the day the property was acquired. The same date of each following month is the beginning of a new month, regardless of the number of days in the preceding month. For example, if you acquired a stock on October 1, 2019, your holding period is considered to have begun on October 2, 2019. The date the asset is disposed of is part of the holding period.
When selling for a loss, you need to be careful of the wash sale rule, which prevents you from deducting a loss on the sale of an asset if you buy the same or “substantially identical” asset within the wash sale period. This means if you sell a stock specifically for a tax loss, you cannot buy it back for 31 days (trade date plus 30 days); otherwise, the sale no longer qualifies for a tax loss.
Overall, you should not postpone good investment decisions just to benefit from the favorable long-term capital gain rate; however, you may consider postponing action when a sell decision is made just short of the one year and a day holding period necessary for long-term capital gain. By the same token, a decision to sell an asset at a loss may involve timing the sale before the long-term holding period to take advantage of short-term capital loss treatment.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.