Capital Gains Holding Period Traps

For ordinary purchased investment property, begin counting on the day after acquisition and include the disposition date. A holding period of more than one year is long term; one year or less is short term. Moving into a new calendar year does not satisfy the test. Use actual dates rather than counting the number of tax returns filed while the asset was owned.

Special acquisition rules can change the answer. Inherited property generally receives long-term treatment regardless of how soon it is sold. A gift using the donor’s basis generally includes the donor’s holding period; a gift using fair market value for loss generally starts a new period. These rules depend on the basis regime, so identify acquisition basis before classifying the sale. They do not mean every asset held after a gift or inheritance produces a deductible capital loss.

First net short-term gains and losses. Separately net long-term gains and losses. If one category is positive and the other negative, offset them and preserve the character of the larger amount. A $6,000 net short-term loss against a $9,000 net long-term gain leaves a $3,000 net long-term gain. Do not apply preferential long-term rates to the gross long-term gains before performing the required netting.

For individuals, a net capital loss can generally offset up to $3,000 of other income per year, or $1,500 if married filing separately. Excess losses carry forward under the applicable rules and retain their short-term or long-term character. Personal-use property losses are generally nondeductible and do not enter the capital-loss pool simply because the property is a capital asset. Collectible gains and certain real-property gains can require additional rate categories.

A wash sale generally occurs when stock or securities are sold at a loss and substantially identical stock or securities are acquired within 30 days before or after the sale. The window covers 61 days including the sale date. The rule concerns losses, not an automatic deferral of gains. Replacement purchases can include different transactions or accounts, so a broker’s reported adjustment may not identify every relevant acquisition.

For an ordinary taxable-account replacement, the disallowed loss generally increases the replacement property’s basis and its holding period includes the old holding period. A replacement through an IRA or Roth IRA is an important exception: the usual basis increase does not rescue the disallowed loss. Partial replacement requires matching the applicable shares. A price recovery after the sale is irrelevant unless the replacement-acquisition conditions are met.