What is a Holding Period?

Holding Period is the amount of time that the purchaser of property is the record owner of that property. The holding period does not necessarily require physical position. This time period is significant as it affects tax liability for capital gains. There are two types of holding periods: short and long term - each with a distinct tax rate.

How Does a Holding Period Work?

In the financial field, HPR (holding period return) is the return (output) on a portfolio or an asset that is kept for a certain time span. This whole process is believed as the simplest measure with great significance of investment performance. In the context of investment, holding period return shows a shift in the investment, portfolio or asset value during a certain time period. HPR shows any types of profits or losses, that are the capital gains and sum-income divided by the starting period value. Every type of profit from assets is known as capital gains. 

HPR = (End Value - Initial Value) / Initial Value 

Here, End Value income means the revenue that is gained from an investment, e.g. dividends There are certain financial risks of a holding period. These financial risks appear when an organization gives a sales quote to its retail client for a specified time duration and asks the firm to sign this commodity offer. With financial perspective, such offer by any organization is a huge financial disadvantage because of the market price change in the wholesale market. The offering organization reduces this type of risk by adding a risk premium to the wholesale cost of products or commodities. 

Example of Holding Period 

There are different types of holding periods used with different business settings. For instance, the holding period against security begins from the very first day of purchasing and lasts until selling time. The short-term period is always shorter than 1 year. However, in comparison, the long-term period is categorized as the time that is of one year or elapses beyond one year. The following example can assist to understand the concept of short or long term holding periods. i.e. if security is purchased on July 1, 2012, while it was sold on December 30, 2012, would be considered a short-term holding period. Because the time does not elapses 6-month period. Similarly, the concept behind the long-term holding period is easy to understand by counting the time frame that is more than one year. If an item is bought on March 1, 2017, and its selling took place on April 31, 2018, this makes 13 months time duration and it is categorized as a long-term holding period.