Investing in the stock market puts your money to work for you so you can achieve your investment goals. But, except for dividend payments, the only way to lock in the profits from an investment is to sell your shares. There's no minimum holding period for selling a stock after you buy it, but you might save money on taxes if you hold it for over a year.
Your holding period for a stock refers to the amount of time you own it. Usually, it won't come down to a single day making a difference, but just in case, you count from the day after you buy the stock until and including the day you sell it. For example, say you buy the stock on January 10, 2013. If you sell it on January 10, 2014, you've held it for precisely one year, because your holding period starts running the day after you buy it -- January 11, 2013 -- and stops running on the day you sell it, January 10, 2014.
Holding Period Significance
The length of your holding period has big tax implications. When you hold the stock for more than one year, your gain or loss is classified as long-term. When you hold it for less than one year, it's short-term. Short-term gains are taxed at your ordinary income tax rates, while long-term gains are taxed at much lower rates. For example, as of 2013, your long-term gains are tax-free if you fall in the 15 percent or lower tax bracket. If you're in the 25 percent through 35 percent bracket, the gains are taxed at 15 percent. If you've made your way all the way to the top ordinary income tax bracket (39.6 percent), your long-term capital gains are taxed at 20 percent.
Figuring Your Gain or Loss
To figure your gain or loss when you sell the stock, you need to know your basis for the stock and your net proceeds. Your basis is what you paid to acquire it: the cost of the stock plus any transaction fees. Your net proceeds are what you sold the stock for minus any transaction fees. For example, say you bought shares for $900 and sold them for $1,000, paying a $10 fee each time. Your taxable gain is $80.
Let's face it: Even Warren Buffet buys a losing stock every so often, so it's no surprise that not all of your investments work out as you'd hoped. When you admit the losses to Uncle Sam, you get a tax break. You can use your losses to cancel out your capital gains for the year. If you have a particularly bad year and your losses exceed your gains, you can deduct up to $3,000 ($1,500 if married filing separately) of your excess losses against your ordinary income as of 2013. The rest gets carried over to the next tax year.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."