Capital Gains on Leap Year Day

Technicality creates trap

By Kaye A. Thomas
Posted February 26, 2008

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Don't leap to the wrong conclusion.

Are you one of those people who like to cut it close when selling for long-term capital gains? If so, you need to be aware of a technicality that creates a possible trap for people selling shares this Friday, which is Leap Year Day, February 29. You're likely to think you have a long-term gain if you bought those shares February 28 of the previous year, but that's incorrect.

Basic rule: hold more than a year

Most people who pay attention to this kind of thing are aware that you don't have a long-term capital gain until you've held shares more than a year. Often that's expressed as a requirement to hold shares at least a year and a day. Holding shares exactly a year won't do the trick.

Failing to hold long enough can be costly, because a short-term gain is taxed at the same rates as ordinary income, which run as high as 35% under current law. With some exceptions we normally don't have to worry about, the highest rate for long-term capital gain is 15%.

How long do I hold thee? Let me count the days . . .

Some people figure they should be okay if they sell on the same day in the following year. They're assuming they've held more than a year because they held the shares on, say, April 10 of one year, April 10 of the following year, and all the days in between, and that adds up to a full year plus a day. That's incorrect, though. If you sell on the first anniversary of your date of purchase, your gain or loss is short-term. You don't get credit for both the date of purchase and the date of sale.

Normally you've held long enough if you sell on the day after the first anniversary of the date of purchase. If you bought on April 10, a sale on April 11 the following year produces long-term capital gain or loss. There's just one day this doesn't work: February 29. If you buy shares on February 28 in a year preceding a leap year, and sell them on the following February 29, your gain or loss is short-term, not long-term.

This surprising outcome is the result of a technicality. Your holding period for an asset is deemed to begin on the day after the date of purchase. That's why you can't get a long-term gain when selling on the anniversary of the date of purchase. If you buy on April 10, your holding period technically begins on April 11. That's why you have to wait until April 11 of the following year to sell for a long-term gain.

Although your holding period technically begins on April 11, you would still report April 10 as the date of purchase on your tax form. The IRS expects to see the date of purchase on Schedule D, not the date that marks the start of the holding period.

A purchase on February 28 in a year that isn't a leap year gives you a holding period starting on March 1. Selling on February 29 the following year may seem good enough because it's a year and a day after the date of purchase. In reality though, you have a holding period that began March 1 and ended February 29 of the following year. The way these rules work, that's a holding period of exactly one year: not good enough, because you need to hold more than a year to have a long-term capital gain.

To be precise, the rule requires you to hold shares until anniversary of the day after the date of purchase for a long-term capital gain. In the case of a purchase on February 28 of the year before a leap year, this is not the same as holding until the day after the anniversary of the date of purchase.

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