Every taxable sale ends in one subtraction: what the customer received minus what the shares cost for tax purposes. Most tax questions on the exam really ask how that cost was set or moved, and how long the holding-period clock has run.
When a customer sells a security, the gain or loss is the amount realized (sale proceeds after commissions) minus the cost basis (generally the purchase price plus commissions). The holding period is how long the customer owned the security. Under Internal Revenue Code (IRC) Section 1222, an asset held more than one year is long-term, and one held one year or less is short-term. Long-term capital gains are taxed at 0%, 15% or 20%, while short-term capital gains are taxed as ordinary income.
TRAP: Exactly one year is still short-term. Stock bought March 10, 2025 and sold March 10, 2026 produces short-term capital gains. March 11, 2026 is the first long-term sale date.
Netting gains against losses. At year end, the customer's results are combined in a fixed order:
Common mistakes
- Capping before netting: The $3,000 limit applies only to the final net loss. A $9,000 long-term loss against a $6,000 short-term gain nets to $3,000, fully deductible, with nothing carried forward.
- Treating a wash-sale loss as gone: It moves into the replacement shares' basis. A $1,000 disallowed loss on 100 shares rebought at $40 gives them a $50 per-share basis.
- Giving equity options the 60/40 split: A gain on a single-stock call held three months is entirely short-term; only Section 1256 contracts get 60/40.
Bottom line
- Long-term means held more than one year, counted from the day after trade date; net short-term and long-term separately, then together, and deduct up to $3,000 of net capital loss a year, carrying the rest forward with its character.
- Qualified dividends need more than 60 days of ownership in the 121-day window starting 60 days before the ex-dividend date; nonqualified dividends are ordinary income.
- A wash sale (substantially identical stock or call options bought within 30 days before or after a loss sale) adds the disallowed loss and the old holding period to the new shares.
- Splits and stock dividends spread basis; rights worth 15% or more get allocated basis; conversions carry basis and holding period; FIFO applies unless shares are identified by T+1 or by standing instruction.
Exam shortcut
Find the clock before the dollars. Check every date in the stem first. A sale exactly one year after purchase, a put bought on stock held a year or less, a gift worth less than the donor's basis, or an inheritance each changes the holding period before any math. Then fix basis before netting.
The full lesson (about 4,635 words, 31 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C28
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