Tax Center

Long-term vs. Short-term

Depending on how long securities have been held, capital gains can be taxed at a lower rate than that of your ordinary income. If you hold securities for more than one year, any gains from the sale of these securities are called Long-term capital gains, and are taxed at 15% as opposed to the ordinary income rate of up to 35%.

To minimize the impact of taxes on your investments, monitoring the holding period is very important. For example, if you are considering selling securities that you bought 11 months ago, holding it for an additional month will qualify the gains as long-term. Unless the market price of securities falls substantially in the final month, you will benefit from the lower tax rate on the gains. By the same token, if an investor wishes to benefit from the lowered tax rate then he or she should try to avoid long-term capital losses, which would offset the long-term capital gains which are taxed at a favorable rate.

If you received a dividend in the form of stock and you intend to sell it, the same rules apply. Just be aware that the holding period begins on different dates, depending on whether the dividend is taxable or not. For a taxable stock dividend, the holding period starts the day after the distribution date. But the holding period of a tax-free stock dividend starts the day you purchased the original stock.

Note: *December 31st is the last day you can execute a sell order for the current tax year, even though the transaction will not settle until the following year.

However, short sell transactions are an exception to this rule. Their settlement date must fall on or before December 31st to be considered for the current tax year. The realized gain/loss is calculated based on the settlement date, and not the date of the original transaction.