Does transferring a stock from one holding entity (which held the stock for more than a year) to another entity, then selling it, qualify for long-term capital gains tax?

by Michael A. Gillen, CPA | Oct 19, 2018

If I've owned a stock in my holding entity for longer than one year, transfer the stock to another entity (which I also have ownership in), and then sell half of that stock, does that still qualify under long-term capital gains?

There are insufficient details to provide a clear and complete response. Your question includes the word “'stock” which suggests a corporate entity rather than a partnership or one of many noncorporate entities, each having differing tax implications. You include the words “transfer the stock,” which suggests a nonrecognizable gain or loss pursuant to federal code and regulations. You include the concept of a transfer “to another entity which I also have ownership in,” which may be subject to the related-party rules that often change the traditional tax implications. With that said, I can only provide a very general response, and I strongly suggest that you consult a CPA so the specific facts and details of your ownership and activities can be evaluated to reach the proper tax treatment.

Holding period requirements for long- and short-term capital gains/losses are generally measured by the seller’s ownership period, not by the entity’s holding period (of underlying assets, for example). Generally, any capital asset (such as stock) that is held for one year or more is treated as long-term and subject to favorable tax rates. Any asset held less than one year is considered to be short-term. Generally, any sale of stock, provided the related-party rules do not apply, would result in long-term tax treatment. However, no gain or loss shall be recognized if your stock is transferred to a corporation by yourself solely in exchange for stock in a new corporation, and immediately after the exchange you are in control of the new corporation.

Again, you should consult a CPA, as the details will drive the tax reporting treatment.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Michael A. Gillen, CPA, is director of the tax accounting department at Duane Morris LLP in Philadelphia.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
Financial FAQs

Search the most frequently asked finance and accounting questions and read the responses from PICPA members. Always consult a CPA before taking action.