Stuck in standstill traffic, you turn up your favorite Podcast. You listen to a list of upcoming spinoffs that interest you, but you wonder how long do you have to hold stock to avoid tax? Pulling up Event Driven Daily on your phone, this is what you learn …
How Long Do You Have to Hold Stock to Avoid Tax?
How long you have to hold stock to avoid tax depends on your country’s regulations. In the United States, you will not completely avoid taxes. When you sell a stock for a profit the excess amount over your initial investment is taxed. Your profits are called capital gains, and the tax is called capital gains tax. Avoiding capital gains tax may not be possible, but you can reduce the tax rate based on how long you hold the shares.
Part of the success strategy of the prudent investor is to ask, how long do you have to hold stock to avoid tax? Here’s how it works in the U.S.:
Short-Term Capital Gains – Gains realized on assets held for one year or less are taxed at the ordinary income tax rate.
Long-Term Capital Gains – Assets held for more than one year and then sold at a profit are taxed at a reduced rate. This rate is usually lower than the ordinary income tax rate, with both short and long-term capital gains taxes based on an investor’s income tax bracket.
How long do you have to hold stock to avoid tax? Tax avoidance may not be possible, but tax reduction is, and it is holding period dependent. Let’s look at the tranches of long-term capital gain taxes.
Long-Term Capital Gains Rates – The 2024 U.S. long-term capital gains rates are as follows:
- 0% for individuals in the 10% and 12% income tax brackets.
- 15% for the individual 22%, 24%, 32%, and 35% income tax bracket.
- 20% for the 37% or greater individual income tax bracket.
Tax Treatment Strategy Considerations
Qualified Dividends – In the U.S., dividends on stocks held for a specific period can be taxed as lower long-term capital gains, avoiding the higher ordinary income tax rate. The favorable tax treatment requirement is the stock must be held for more than 60 days during a 121-day period which begins before the ex-dividend date. The ex-dividend date is the date when the shares trade without the value of their next dividend. When a dividend is paid, the stock price temporarily trades lower to reflect the dividend distribution. The date when the stock trades without the reduction of its next payment is the ex-dividend date.
Tax-Loss Harvesting – When you sell a stock at a loss, the loss can be used to offset, or reduce, any capital gains on other profitable sell transactions. This favorable provision can be used to offset previous losses or utilized to lower capital gains taxes on other investments, thus reducing your overall tax liability.
Wash Sale Rule – You cannot sell a stock at a loss and then immediately buy it back to claim the tax benefit without materially changing your investment position. The Wash Sale Rule does not allow a tax loss deduction if you purchase a substantially identical stock within 30 days before or after the sale that generated the original loss. Continued violation of this rule will result in suspension of your trading account and unwanted IRS scrutiny.
How long do you have to hold stock to avoid tax? Total tax avoidance may be possible if capital gains are allowed to accumulate in a retirement account such as a Roth IRA. For those select few who can defer withdrawal for ten years or more, this may be an option. The majority of investors can hold shares for more than a year, sell, and pay reduced capital gains taxes and profit quite nicely.
