Investment Company and. Variable Contracts Products Principals (Series 26) Practice Exam

What is the holding period for a long-term capital gain?

1. 1 year or less

2. More than 1 year

3. 2 years or more

4. 5 years or more

The correct answer is: More than 1 year

The holding period for a long-term capital gain is defined as more than one year. This designation is crucial for tax purposes, as it affects how capital gains are taxed. Long-term capital gains are typically taxed at a lower rate than short-term gains, which are generated from assets held for one year or less. Consequently, understanding the distinction between long-term and short-term capital gains is vital for investors seeking to optimize their tax liabilities. Holding an investment for more than one year allows the investor to benefit from these favorable long-term capital gain rates, which is a significant incentive for strategic investment planning. This period encourages longer holding of investments, potentially leading to more stable returns over time. The other choices mistakenly define the holding period for a long-term capital gain. A holding period of one year or less pertains to short-term gains, while periods of two years or more do not factor into the standard criteria for classifying gains as long-term. Similarly, the five-year period is irrelevant in the context of determining capital gains classifications.