The One-Year-and-a-Day Rule
Gains on assets held one year or less are taxed at ordinary rates up to 37%. Hold more than one year and the top rate drops to 20%. With the 3.8% investment tax on both, that is 40.8% against 23.8%, and on a $100,000 gain it is $17,000 of tax depending only on the sale date.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Investors sitting on large gains in positions bought less than a year ago
- Owners selling real estate, a business interest, or private shares near the one-year mark
- High earners in the 32%, 35%, or 37% brackets, where the rate gap is widest
- Anyone who can wait a few days or weeks without taking on unacceptable investment risk
Who it's not for
- Positions where the risk of holding longer outweighs the tax saving
- Taxpayers whose ordinary rate is already close to their capital gains rate
- Sales of losses, where short-term treatment can be more useful against short-term gains
How it works
A gain is long-term only if you held the asset more than one year. The holding period starts the day after you acquire the asset and includes the day you sell. If you buy on February 5, 2025, a sale on February 5, 2026 is short-term. A sale on February 6, 2026 is long-term. That is the one-year-and-a-day rule.
Long-term gains are taxed at 0%, 15%, or 20%, depending on taxable income, with bracket thresholds indexed for inflation each year. Short-term gains are added to ordinary income and taxed at your regular bracket. The 3.8% net investment income tax applies to both once you are above $200,000 single or $250,000 joint.
Some holding periods carry over. Gifted property takes the donor's holding period. Inherited property is treated as long-term no matter how briefly anyone held it. Shares bought in a wash sale take on the holding period of the shares sold.
Use the trade date, not the settlement date, to count. For real estate, the date ownership passes usually controls, and the closing date can be negotiated.
Some gains have their own rates even when held long-term: collectibles at up to 28% and unrecaptured depreciation on real estate at up to 25%. Holding longer still helps, but the saving is smaller.
Illustrative example
Illustrative: an investor in the top bracket has a $100,000 gain on stock bought 11 months ago. Both scenarios include the 3.8% net investment income tax.
- Sell now (short-term): $100,000 x 37% = $37,000 + $100,000 x 3.8% = $3,800; total $40,800
- Wait until the holding period passes one year (long-term): $100,000 x 20% = $20,000 + $3,800 = $23,800
- Difference: $40,800 - $23,800 = $17,000
In this illustration, waiting about one more month keeps $17,000 more of the same gain, if the stock price holds.
The rules
| Rule | Citation |
|---|---|
| Long-term capital gain requires holding the asset for more than one year. | IRC §1222 |
| Net capital gain is taxed at the reduced 0%, 15%, and 20% rates, with higher rates for collectibles and unrecaptured §1250 gain. | IRC §1(h) |
| Gifted property can carry over the donor's holding period. | IRC §1223(2) |
| Inherited property is treated as held more than one year. | IRC §1223(9) |
| Shares acquired in a wash sale take on the holding period of the shares sold. | IRC §1223(3) |
Watch-outs
- Count from the trade date and confirm with your brokerage records. A one-day error turns the whole gain short-term.
- Protective hedges such as short sales against the box, collars, or certain options can suspend or reset the holding period under the straddle and short-sale rules.
- The price can fall while you wait. Weigh the tax saving against what the position could lose in the same period.
- Dividends need their own holding period, more than 60 days in a 121-day window, to get the qualified rate.
What we do
We review your open positions and pending sales for gains near the one-year line, show the tax at each possible sale date, and coordinate timing with your investment advisor. We report the holding periods correctly on Form 8949 and Schedule D.
Questions
Is it exactly 366 days?
No. The test is more than one year by calendar date. Start counting the day after you bought, and sell after the one-year anniversary of the purchase date.
Does the rule apply to real estate and business sales too?
Yes. It applies to capital assets and to §1231 business property, though depreciation recapture is taxed under its own rules.
What about crypto?
Digital assets are property, and the same holding-period rules apply to each unit sold.