Understanding how the holding period works can save you money down the line.
The stock market provides investors with a great opportunity, but if you don't understand how holding periods work, you may also give up a lot of your gains through taxes.
The holding period is the amount of time you've owned a stock, and this time frame can be the difference between paying no taxes or giving up thousands of dollars to the IRS. To clear up any confusion around holding periods and how it may impact your tax bill, here are some points to remember as you prepare to file your tax return.
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When you sell stock investments and earn a profit, you step into the world of capital gains. All this means is that you've made some money in the market and as a result, you owe the IRS a piece of your earnings. Your tax bill is partially determined by how long you've held the stock.
If you kept your position for a year or less, you're subject to short-term capital gains tax rates. These rates can be pretty high, going up to 37% for higher-income earners. It's the same rate that you pay on your regular income from a job. When you are quick to sell your investments, you miss out on the favorable tax rates that come with long-term capital gains rates.
If you are seeking to lower your tax bill, you want to unlock long-term capital gains rates, which give you access to 0%, 15%, or 20% tax brackets. These special rates require that you hold on to your stock for over a year.
Let's say you bought 100 shares of Microsoft on Aug. 12, 2019, for $136 per share. Then, you sell 50 shares of this stock on Aug. 13, 2020, for $210 per share. Your return would be $74 per share, so in total, you would have a long-term capital gain of $3,700 that would fall into one of three favorable rate buckets, because you held your investment for just over a year.
That's the secret to paying less in taxes. It's the magic time period in order to save money on your tax bill. As you can see from the table below, you can pay no taxes on long-term capital gains if your taxable income is less than $40,400 (as a single filer) or $80,800 (married, filing jointly).
Single Filers; Taxable
Income of:
Married Filing Jointly;
Taxable Income of:
Heads of Households;
Taxable Income of:
Long-Term Capital
Gains Rate
