Hold for 1 Year (Long Term Capital Gains)

Holding stock for at least one year before selling provides preferential long-term capital gains tax treatment.

Strategy Overview

Gains on investments (e.g. shares of stock) are taxed differently based on how long they have been owned. Holding for at least 1 year from the date of purchase (or date of exercise/vesting depending on the stock comp type) allows the gain upon sale to qualify for preferential long-term capital gains tax treatment, which can be as much as 17 percentage points lower (37% --> 20%).

Tax Details

The IRS has special tax rules for certain items (typically to encourage certain types of activity). One of these is the tax applied to capital gains on investments held for at least 1 year (called "long-term capital gains").

• Short-term capital gains occur if you owned the asset for one year or less. Short-term capital gains are taxed at ordinary income rates, which can be as high as 37%.

• Long-term capital gains occur if you owned the asset for more than one year. The tax rate for long-term gains is lower, and has its own progressive tax schedule (which is a function of your total income), with a top rate of 20%.

• Note: An additional 3.8% for Net Investment Income Tax ("NIIT") may also apply

Holding stock acquired from equity compensation for at least one year enables gains to qualify for advantageous long-term capital gains rates when eventually sold. Strategically, if you've owned stock for less than 12 months and the shares have increased in value, waiting until you cross the 1 year mark could lead to significant tax savings versus selling earlier.

Holding stock versus selling has investment risk, and optimizing for investment risk is many times more important than tax optimization. Hedging your stock for a period of time to achieve long-term status may also make sense in some situations (for more information see Hedge Your Stock).

Key Benefits

• Reduced tax rate. You may be able to reduce the applicable tax rate on your capital gains by as much as 17 percentage points by holding for at least one year vs selling prior.

Key Considerations/Flags

• Investment risk. Maintaining an investment holding you may otherwise desire to sell (including a highly concentrated stock position) exposes you to investment risk/potential declines in the value of the stock.

• Hedging strategies may help you manage investment risk. For more information see Hedge Your Stock.

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• If you have stock that has significantly increased in value, but you've held/owned the holding for less than 1 year

• If you are OK with the investment risk of holding longer and have flexibility on when you need liquidity from the shares

🔴 When to Not Use This Strategy:

• If you are concerned about, or uncomfortable with the possibility of, the stock price declining in value

• If you need cash/liquidity from the sale of the stock

🟡 Consider on a Case by Case Basis:

• If you have a highly concentrated stock position. The risk of continuing to hold a concentrated position may outweigh tax benefits of waiting.

Example