What Is Considered Holding Long Term for Stocks?
If you made a profit on a stock you sold, the Internal Revenue Service considers that to be taxable income. You are required to report the price you originally paid for the stock, how much you received when you sold it and the amount of your capital gain. You also must report how long you held the stock, because that holding period determines the percentage tax you pay.
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Long-Term Gain
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When you are thinking about selling a stock, one of the first things you should look at is the holding period. You can determine when you bought the stock by looking at the purchase confirmation you received, or by checking with your broker. If you held the stock for a year or less on the day you sold, you have a short-term capital gain. If you held the stock for at least a year and a day, you have a long-term capital gain.
Tax Implications
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The tax difference between a short-term capital gain and a long-term one can be enormous, and the tax implications should figure into your decision to hold or sell. When you sell a stock you have held for a year or less, any profits are taxed at your ordinary income tax rate. If you are a high earner, that rate could be as much as 35 percent. But if you hold the stock for at least a year and a day, the top tax rate drops to 15 percent. That can make a huge difference, especially if you have a substantial profit in your portfolio.
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Tax-Deferred Accounts
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If you hold stocks in a tax-deferred account like a 401(k) or IRA, you do not have to worry about the short-term vs. long-term holding period. That is because any profits you make along the way are tax-deferred, and you only pay taxes on the money when you actually start to withdraw it. That tax treatment makes IRAs and similar accounts good vehicles for stock market investing, because you can make your investment decisions based solely on the merits of the company, without regard to the tax implications of a purchase or sale.
Tax Planning
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If you have stocks you would like to sell, do some advance tax planning to see how your taxes would be affected if you went ahead with your plans. You can start by looking at each stock you want to sell and determining whether you have a short-term or a long-term capital gain. From there you can determine which stock sales make sense and which ones should be postponed until you can qualify for the lower long-term capital gains tax. While the decision to sell a stock should be based primarily on the stock itself, taxes are still an important consideration.
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References
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