The short-term holding period is one year or less. Short-term capital gains are taxed at ordinary income tax rates.
The long-term holding period is more than one year. Long-term capital gains are taxed at discounted long-term capital gains rates. The long-term tax rate will be either zero percent or 15%, depending on your marginal tax bracket.
The holding period is determined from the day after you bought your investment until the date you sold your investment. (Revenue Ruling 70-598.) In Publication 550, the IRS states, "To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period."
For example, Mary invests in XYZ stock on January 4, 2011. She sells the stock on January 4, 2012. Mary's holding period for the stock is exactly one year, since we begin counting from January 5, 2011. Accordingly, Mary's investment is short-term in nature.
Let's change the example slightly. Mary sells the stock on January 5, 2012, instead. Mary's holding period is now one year and one day. This is now a long-term investment.
Tax planning for investors focuses on deferring the sale of profitable investments until you qualify for the discounted long-term capital gains tax rate.
