You may often hear the term "long-term investment" in the context of company investments or your own, but you may not be clear on the distinction between the two. That's probably because the definition is slightly different when discussing the accounting records of an investment, versus the Internal Revenue Service's view of your own investments. Understand both definitions of long-term investments to understand what you're doing with your investments and what the companies you invest with are doing with their own.
When you look at the financial records for companies that you invest in, you should understand what they mean when they list long-term debts on the balance sheet. According to the authors of "Financial Accounting: Tools for Business Decision Making," investments are generally considered to be long-term if they are either an investment in securities issued by other companies that have been held for more than one year, or they are long-term assets — such as land — that the company is not currently using in its operating activities.
If a company purchases stocks in another company and holds them for a year and a day, this would generally be considered a long-term investment — from an accounting perspective. But if the company dropped the investment a few days earlier, it would generally be considered a short-term investment. If a company purchases a building unrelated to its operating activities, it would generally be considered a long-term investment regardless of how long it has been held — whether it's been days or years.
While the accounting definition of a long-term asset is useful to know when reviewing your investments, you will need to understand the IRS definition for your own financial purposes. The IRS defines a long-term investment as an asset that you have held for more than one year — whether it is a marketable security, such as a stock or bond, or a real estate investment. This is an important distinction because income from long-term dividends is taxed at the lower capital gains tax, while short-term investments are taxed as ordinary income.
The IRS recognizes whether an investment is long- or short-term when a gain or loss is made. If you purchase a stock or real estate on June 15 of one year, and sell it on June 15 of the following year, then it is recognized as a short-term investment because you have held it for one year or less. If you were to hold on to that investment for just one day, it would automatically be considered a long-term investment.
- Financial Accounting: Tools for Business Decision Making; Paul D. Kimmel, Jerry J. Weygandt et al.
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