# Understanding and Calculating Investment Holding Periods for Optimal Returns

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## What Is a Holding Period?

A holding period is the time between buying and selling an investment. It plays an important role in determining capital gains taxes. Investments held for a short-term period are taxed differently than those held over longer periods. You can calculate the holding period and measure your profit or loss using a formula that considers income earned and price changes relative to the initial investment.

### Key Takeaways

*   A holding period is the time between the purchase and sale of a security.  
    
*   Short-term holding lasts less than a year, affecting capital gains tax.  
    
*   Long-term holding periods exceed one year and are taxed at favorable rates.  
    
*   Holding period return reflects total asset return in a specific time frame, expressed as a percentage.  
    
*   Dividends have a minimum holding period to qualify as tax-advantaged.

## Evaluating Holding Periods for Tax Implications

The holding period helps determine the tax on [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) or losses. A long-term holding period lasts one year or more. Investments held for less than a year are considered short-term holds. Dividends paid into an account also have a holding period.

[Holding period return](https://www.investopedia.com/terms/h/holdingperiodreturn-yield.asp) is the [total return](https://www.investopedia.com/terms/t/totalreturn.asp) from an asset or [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) over a set time, usually shown as a percentage. Holding period return is calculated from the total returns, which include income and value changes. It's useful for comparing returns on investments held for different time periods.  

## Calculating Investment Holding Periods: A Guide

Starting on the day after the security's acquisition and continuing until the day of its disposal or sale, the holding period determines tax implications. For example, Sarah bought 100 shares of stock on Jan. 2, 2016. When determining her holding period, she begins counting on Jan. 3, 2016. The third day of each month after that counts as the start of a new month, regardless of how many days each month contains.

If Sarah sold her stock on Dec. 23, 2016, she would realize a short-term capital gain or [capital loss](https://www.investopedia.com/terms/c/capitalloss.asp) because her holding period is less than one year. If she sells her stock on Jan. 3, 2017, she would realize a long-term capital gain or loss because her holding period is more than one year.

Holding period return can therefore be represented by the following formula:

$\begin{aligned} &\text{Holding Period Return} = \frac { \text{Income} + ( \text{EOPV} - \text{IV} ) }{ \text{IV} } \\ &\textbf{where:} \\ &\text{EOPV} = \text{end of period value} \\ &\text{IV} = \text{initial value} \\ \end{aligned}$

## Key Rules and Considerations for Holding Periods

When receiving a gift of appreciated stock or other security, the determination of the recipient’s [cost basis](https://www.investopedia.com/terms/c/costbasis.asp) is by using the donor’s basis. Also, the recipient’s holding period includes the length of the donor’s holding period. This continuation of holding is called “tacking on” because the recipient’s holding period adds value to the donor’s holding period. In cases where the recipient’s basis is determined by the fair market value of the security, such as a gift of stock that decreased in value, the recipient’s holding period starts on the day after receiving the gift.

### 1 year

The holding period after which the IRS considers an investment a long-term gain (or loss) for tax purposes. Long-term capital gains are taxed at a more favorable rate than short-term gains.

The holding period for stock you received as a _taxable_ stock dividend begins on the date of distribution. On the other hand, the holding period for new stock you received as a _nontaxable_ stock dividend begins on the same day as the holding period of the old stock. Meeting the minimum holding period is the primary requirement for dividends to be designated as qualified. For common stock, the holding must exceed 60 days throughout the 120-day period, which begins 60 days before the ex-dividend date. Preferred stock must have a holding period of at least 90 days during the 180-day period that begins 90 days before the stock's ex-dividend date.

Holding also applies when receiving new stock in a company spun off from the original company in which the investor purchased stock. For example, Paul purchased 100 shares of stock in April 2023. In June 2024, the company declared a two-for-one [stock split](https://www.investopedia.com/terms/s/stocksplit.asp). Paul then had 200 shares of company stock with the same holding period, starting with the date of purchase in April 2023.

## How Long Do You Need to Hold a Stock for Capital Gains?

Under IRS regulations, if you hold a stock for longer than one year, the investment gains are taxed at the long-term capital gains rate of 0, 15, or 20%. If you hold the stock for less than one year, the gains are taxed at the same rate as ordinary income, which can be up to 37%.

## How Long Do You Need to Hold a Mutual Fund?

Mutual funds discourage investors from trading frequently, which can cause the fund's expenses to rise. To deter high-frequency trades, many mutual funds have a [30-day rule](https://www.investopedia.com/articles/investing/121715/guide-mutual-funds-trading-rules.asp#:~:text=To%20discourage%20excessive%20trading%20and,changes%20in%20a%20fund's%20NAV.) to prevent new buyers from selling their fund shares immediately. Funds may charge early redemption fees, or they may prohibit traders from making trades for a certain number of days.

## What Is the Holding Time for Insider Trades?

[SEC Rule 144](https://www.investopedia.com/terms/r/rule144.asp) governs the sale and issue of stock shares that are not available to the public, such as those issued to corporate directors and insiders. Under this rule, shares in a public company must be held for six months before they can be sold. If the company is private, the holding time is one year.

## The Bottom Line

The holding period is how long you keep an investment before selling it. It determines how capital gains or losses are taxed, with different rules set for short- and long-term holdings. Special rules also apply to holding periods for gifts, insider trades, and stock dividends, all of which can impact tax outcomes and investment strategies. As an investor, you should understand these rules and the tax implications so you can make better decisions about when to sell or hold your investments based on the security and market conditions.  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Topic 409: Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409)."
>     
> 2.  Internal Revenue Service. "[Publication 550 Investment Income and Expenses](https://www.irs.gov/pub/irs-pdf/p550.pdf)," Page 80.