Holding Period

What it means

Your holding period is simply the amount of time you keep your company stock after you receive it. The clock usually starts the day after you become the official owner of the shares.

In the world of taxes, how long you hold your stock determines how the government taxes your profit when you sell. If you hold shares for more than a year, you may qualify for lower tax rates on your profit, known as long-term capital gains.

A simple example

Imagine Sarah buys 100 company shares at $10 each. One year and one day later, the price goes up to $20. She sells all 100 shares for $2,000. Because she held the shares for over a year, she is taxed at the lower long-term rate on her $1,000 profit. If she had sold before the one-year mark, she would pay a higher tax rate on that same profit.

Why it matters to you

• Holding shares for over a year can save you money by lowering your tax rate.
• Special rules apply to Incentive Stock Options (ISOs) where you must hold shares for two years from the grant date and one year from the exercise date to get the best tax treatment.
• A tax professional can help you understand how these timelines affect your personal tax bill.

Common mistakes to avoid

• Do not forget that the holding period starts the day after you acquire your shares, not the day you are promised them.
• Avoid selling too early if you are trying to qualify for specific tax breaks for your Incentive Stock Options.

Words used on this page

• Capital Gain: The profit you make when you sell an asset, like stock, for more than you paid for it.
• Exercise: The act of buying your company stock using the options you were given.
• Grant Date: The day your company officially awards you stock options or shares.
• Incentive Stock Option (ISO): A specific type of stock option that can offer tax advantages if you follow strict holding rules.
• Restricted Stock Unit (RSU): A promise from your company to give you shares after you have worked there for a certain amount of time.