Friday, February 29, 2008

When Is a Year and a Day not a Long Term Gain?

I read an interesting article today and had to share.

It’s one of those quirky things that you would probably not ever think about until you got caught in a really awful situation.

By now you know that long term capital gain is taxed at a lower rate than ordinary income, so if you hold an asset for longer than one year you receive a tax advantage when you sell.You actually must hold the asset for at least a year and a day to qualify.

So, something purchased on March 10 of one year could be sold on March 11 of the following tax year and receive long term capital gains treatment.

So when does this rule of thumb not apply?

Leap year, of course.

If you buy shares on February 28 in a year preceding a leap year, and sell them on the following February 29, your gain or loss is short-term, not long-term.

This surprising outcome is the result of a technicality. Your holding period for an asset is deemed to begin on the day after the date of purchase. That's why you can't get a long-term gain when selling on the anniversary of the date of purchase.

If you buy on April 10, your holding period technically begins on April 11. That's why you have to wait until April 11 of the following year to sell for a long-term gain.A purchase on February 28 in a year that isn't a leap year gives you a holding period starting on March 1.

Selling on February 29 the following year may seem good enough because it's a year and a day after the date of purchase. In reality though, you have a holding period that began March 1 and ended February 29 of the following year.

The way these rules work, that's a holding period of exactly one year: not good enough, because you need to hold more than a year to have a long-term capital gain.

I learn something new every day. Hope you did too.

Paula Straub

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