NCPA - National Center for Policy Analysis

Eliminating The Holding Period For Capital Gains

April 25, 2001

A capital gains tax provision that Senate Republican leaders are reported to be giving serious consideration as an addition to the tax bill is elimination of the capital gains holding period.

Under current law, gains on assets held less than one year are taxed as ordinary income at rates up to 39.6 percent.

However, gains on assets held longer than one year are taxed at a maximum of 20 percent.

And for assets acquired after January 1 of this year and held for at least five years, the maximum rate is just 18 percent.

The tax treatment of capital losses also depends on the holding period. The net short-term gain or loss is combined with the net long-term gain or loss to come up with a final capital gains total. If there is a net loss, taxpayers may deduct up to $3,000 of such losses against other income.

Since capital gains first received special tax treatment in 1921 there has been a holding period of some kind to obtain a lower tax rate, which has varied between six months and 10 years. Nevertheless, there has never been a clear rationale for it.

However, holding periods reduce economic efficiency -- and may even reduce government revenue.

A 1981 study by economist Steven Kaplan for the National Bureau of Economic Research and two studies by the New York Stock Exchange and the Securities Industry Association in 1983 all concluded that elimination of the holding period would modestly raise net revenue.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 25, 2001.


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