Holding Period
Holding Period
Length of time an investment is owned, determining tax treatment of capital gains. More than 12 months qualifies for long-term capital gains (preferential rates of 0%, 15%, or 20%), while 12 months or less results in short-term capital gains (ordinary income rates up to 37%). Holding period begins the day after purchase and ends on sale date.
An investor purchases stock on February 29, 2024. The holding period begins March 1, 2024 (day after purchase). Selling on March 1, 2025 or later qualifies for long-term treatment. Selling on February 28, 2025 (exactly 12 months) is short-term. For a $10,000 gain, this one-day difference could mean $3,700 tax (37% short-term rate) versus $2,000 tax (20% long-term rate), saving $1,700.
Students often believe exactly 12 months qualifies for long-term treatment, but long-term requires MORE than 12 months. A position held exactly 365 days is still short-term. Additionally, many confuse when the holding period starts: it begins the day AFTER purchase, not the purchase date itself. Stock splits and stock dividends do not reset the holding period; it remains based on the original purchase date.
How This Is Tested
- Calculating holding period from specific purchase and sale dates to determine short-term vs. long-term classification
- Determining if a sale qualifies for long-term treatment when held exactly 12 months (answer: no, it is short-term)
- Understanding that holding period begins the day after purchase, not on purchase date
- Recognizing that stock splits and stock dividends preserve the original holding period
- Applying holding period rules to calculate tax liability differences between short-term and long-term gains
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Long-term capital gains threshold | More than 12 months | Exactly 12 months or less = short-term |
| Long-term capital gains tax rates | 0%, 15%, or 20% | Preferential rates based on income bracket |
| Short-term capital gains tax rate | Ordinary income rates (up to 37%) | Same as wages, salary, and other ordinary income |
| Holding period start date | Day after purchase | Purchase date itself does not count toward holding period |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Sarah, a financial adviser, has a client who purchased 500 shares of a growth stock on April 10, 2024, for $50 per share ($25,000 total). The stock is now worth $80 per share ($40,000 total), representing a $15,000 unrealized gain. The client needs $40,000 for a business investment and plans to sell on April 10, 2025 (exactly one year later). The client is in the 35% ordinary income tax bracket and the 15% long-term capital gains bracket. What should Sarah advise regarding the tax implications?
B is correct. The holding period starts the day AFTER purchase (April 11, 2024), so selling on April 10, 2025, is exactly 364 days—still short-term. Short-term gains are taxed at ordinary income rates: $15,000 × 35% = $5,250. If the client waits until April 11, 2025 (more than 12 months), the gain qualifies for long-term treatment: $15,000 × 15% = $2,250, saving $3,000 in taxes. This is a critical tax planning opportunity.
A is incorrect because selling on April 10, 2025, does not qualify for long-term treatment (exactly 12 months from purchase date, but less than 12 months from holding period start date). C is incorrect because even when funds are needed, advisers should inform clients of tax consequences; waiting one day saves $3,000. D is incorrect because 1031 exchanges apply to real estate, not securities.
The Series 65 exam tests your ability to apply precise holding period calculations in client scenarios and quantify tax savings. Understanding that the holding period starts the day after purchase and that exactly 12 months from purchase is still short-term demonstrates competency in tax-efficient planning that can save clients thousands of dollars.
When does the holding period for a security begin for capital gains tax purposes?
C is correct. The holding period for capital gains tax purposes begins the day after the trade date (the day after the purchase). If you purchase stock on Monday, January 15, the holding period begins Tuesday, January 16. This means you must hold until at least January 16 of the following year (plus one day) to achieve long-term status.
A is incorrect because the holding period begins the day AFTER the trade date, not on the trade date itself. B is incorrect because the holding period is based on the trade date, not settlement date. D is incorrect for the same reason; settlement date is irrelevant for holding period calculation.
The Series 65 exam frequently tests the precise start date of the holding period because it is a common source of error. Knowing that the holding period begins the day after the trade date is essential for accurate tax planning and determining when a position qualifies for long-term capital gains treatment.
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Access Free BetaAn investor purchased shares of XYZ mutual fund on July 15, 2024. What is the earliest date the investor can sell the shares and qualify for long-term capital gains treatment?
D is correct. Step 1: Determine holding period start date:
Purchase (trade date): July 15, 2024
Holding period begins: July 16, 2024 (day after purchase)
Step 2: Calculate 12 months from holding period start:
July 16, 2024 + 12 months = July 16, 2025
Step 3: Long-term requires MORE than 12 months:
Selling on July 16, 2025 = exactly 12 months (short-term)
Selling on July 17, 2025 = more than 12 months (long-term)
Therefore, the earliest long-term sale date is July 17, 2025 (more than 12 months after the holding period start date of July 16, 2024).
A (July 14, 2025) is too early and would be short-term. B (July 15, 2025) would be exactly 12 months from purchase but only 11 months and 30 days from the holding period start date (July 16, 2024), making it short-term. C (July 16, 2025) is exactly 12 months from the holding period start date, which qualifies as short-term, not long-term.
Holding period calculation questions test your ability to correctly determine when long-term status begins. The Series 65 exam expects you to know that the holding period starts the day after purchase and that you must count more than 12 months from that date, making precision in date calculation critical for tax planning.
All of the following statements about holding periods are accurate EXCEPT
B is correct (the EXCEPT answer). A security held for exactly 12 months does NOT qualify for long-term treatment. Long-term capital gains require holding for MORE than 12 months. Exactly 12 months results in short-term classification, taxed at ordinary income rates. This is a critical distinction that frequently appears on the exam as a trap.
A is accurate: the holding period begins the day after the trade date (purchase date). If you buy on March 1, the holding period starts March 2. C is accurate: corporate actions like stock splits and stock dividends preserve the original holding period. If you bought stock 10 months ago and receive a stock dividend today, the new shares also have a 10-month holding period based on the original purchase. D is accurate: long-term gains are taxed at preferential rates (0%, 15%, 20%) versus short-term gains at ordinary income rates (up to 37%).
The Series 65 exam tests your ability to distinguish the precise threshold for long-term treatment. Understanding that exactly 12 months equals short-term (not long-term) prevents costly errors in tax planning and client communication about optimal holding strategies.
An investor purchased 100 shares of stock on October 1, 2024, at $60 per share. On April 1, 2025, the company issued a 2-for-1 stock split. The investor now owns 200 shares. Which of the following statements are accurate?
1. The holding period for all 200 shares begins October 2, 2024
2. The holding period for the original 100 shares begins October 1, 2024, and the new 100 shares begins April 1, 2025
3. Selling all 200 shares on October 2, 2025, would result in long-term capital gains treatment
4. The cost basis per share after the split is $30
B is correct. Statements 1 and 4 are accurate.
Statement 1 is TRUE: The holding period for ALL 200 shares (both original and split shares) begins October 2, 2024 (the day after the original purchase). Stock splits do not reset or change the holding period. The split shares inherit the holding period of the original shares.
Statement 2 is FALSE: As explained above, the holding period for the new shares from the split is NOT the split date (April 1, 2025). All 200 shares have the same holding period starting October 2, 2024.
Statement 3 is FALSE: Selling on October 2, 2025, is exactly 12 months after the holding period began (October 2, 2024). Since long-term requires MORE than 12 months, exactly 12 months qualifies as short-term, not long-term. The earliest long-term sale date would be October 3, 2025 (more than 12 months from October 2, 2024). Note: Selling on October 1, 2025, would be 11 months and 30 days (short-term).
Statement 4 is TRUE: Original cost basis = 100 shares × $60 = $6,000 total. After 2-for-1 split, the total basis remains $6,000 but is now spread over 200 shares: $6,000 ÷ 200 shares = $30 per share. Stock splits reduce per-share basis but preserve total basis.
The Series 65 exam tests comprehensive understanding of how corporate actions like stock splits affect both holding period and cost basis. Recognizing that splits preserve the original holding period while adjusting per-share basis demonstrates mastery of tax calculation principles essential for accurate client reporting.
💡 Memory Aid
Think of holding period like aging wine: It needs to age MORE than 12 months to be premium (long-term, preferential rates). The aging starts the day after you buy it (not the purchase day itself). Exactly 12 months? Still young wine (short-term, ordinary rates). One extra day makes all the difference between paying up to 37% vs. 20% tax.
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Where This Appears on the Exam
This term is tested in the following Series 65 exam topics: