Lesson 1 of 6
Two holding periods
US rules split a realised gain by how long the holding was held, with the line at one year. What that means mechanically, and why the date is the only input.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A gain is not taxed until it is realised, which means sold. An unrealised gain is a change in quoted value and nothing else.
- US rules sort a realised gain into two categories by how long the holding was held, with the line at more than one year.
- Which side of that line a sale falls on is decided by two dates, and the dates are the only input.
Two investors can hold identical positions with identical gains and owe completely different amounts, because one sold and the other did not. That is the first mechanic, and every other one in this course sits on top of it.
The same 10,000 gain, two holding periods
- Gain realised$10,000
- Kept, at an assumed 35 percent rate$6,500
- Kept, at an assumed 15 percent rate$8,500
Realised against unrealised
An unrealised gain is the difference between what a holding is quoted at and what it cost. It is not income, it is not taxed, and it can vanish.
A realised gain is the same difference fixed by a sale. The sale converts a quoted number into an amount, and it is the sale that creates the event.
The consequence is the one thing in this course an investor feels most: the decision to sell is also a decision about when a liability arises. That is a fact about the mechanics. What anyone should do about it is a question for a qualified adviser, and this course does not answer it.
The line, and the two dates
US rules split realised gains into short-term and long-term. The dividing line is a holding period of more than one year. Held for one year or less, a gain is short-term. Held for more than a year, it is long-term, and the two categories are taxed under different rules.
Why the distinction exists at all
The stated purpose of a lower rate on longer holdings is to treat a long-held investment differently from a quick trade. Whether it achieves that is a policy argument this course does not enter.
What matters mechanically is that the split makes a reported pre-tax return an incomplete description of an outcome. Two strategies with identical pre-tax returns can leave the investor with different amounts, purely through how often each realises gains, and that is the subject of the last lesson.
What this does to reading a record
Three things follow for anyone reading their own or anyone else's results.
A pre-tax return and an after-tax return are different numbers, and published returns are almost always pre-tax. A portfolio's realised gains and its change in value are different quantities. And the holding period of each position is a fact that has to be recorded at purchase, because reconstructing it later from a statement is unreliable.
Check yourself
A holding has risen 40 percent and has not been sold. What has been realised?
- The full 40 percent
- Nothing: an unrealised gain is a change in quoted value
- Half of it, at the halfway point
Show the answer
Answer: B.
A gain becomes a taxable event when the position is sold. Until then it is a difference between a quote and a cost, and it can disappear.Bought on 10 March 2025 and sold on 10 March 2026. Which category?
- Long-term
- Short-term
- Split between the two
Show the answer
Answer: B.
The US requirement is a holding period of more than one year. A sale on the anniversary itself is one year, not more than one, so it falls on the short-term side.Two strategies report the same pre-tax return. What can you conclude about what each investor kept?
- They kept the same amount
- Nothing, until you know how often each realised gains
- The one with more trades kept more
Show the answer
Answer: B.
A pre-tax return is silent about realisation. How often gains were realised, and under which holding period, changes the after-tax outcome from the same pre-tax figure.Sources
- IRS Topic no. 409, Capital gains and losses: the classification of a realised gain as short-term or long-term by holding period.
- IRS Publication 550, Investment Income and Expenses: the general treatment of investment gains and the holding-period rules.
What this leaves out
- This is not tax advice. It describes general US mechanics at a high level. Rules differ by country, by state, by account type and by individual circumstance, and they change.
- The 35 percent and 15 percent figures in the opening chart are assumed numbers used to show the arithmetic. They are not anyone's rates and no reader should treat them as such.
- Holding-period rules have exceptions this lesson does not cover, and some instruments are treated differently from ordinary shares.
- Anyone with a decision to make should consult a qualified tax adviser in their own jurisdiction.
- Nothing here is advice about any security.