How does the IRS define "long-term capital gains"?

Editor’s note: A version of this question originally appeared on Reddit.‍

I’m holding non-qualified stock options and I’m confused about how the IRS defines “long-term capital gains.”

If I exercise my shares at least one year before the liquidity event, and sell my shares immediately after the liquidity event, is that considered long-term capital gains by the IRS? Or does the IRS define long-term capital gains as at least one year after the liquidity event itself?

- Anonymous

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Dear Anonymous,

The clock on long-term capital gains begins on the day you exercise your stock options. If you’re earning non-qualified stock options (NSOs), you’ll need to hold onto your shares for at least one year after you exercise (i.e. buy) your NSOs for the profits from a subsequent sale to qualify as a long-term capital gain.

It’s slightly more complicated if you happen to be earning incentive stock options (ISOs). With ISOs, you need to hold onto your shares for at least one year after exercising and two years after the stock options were granted for the profits from a subsequent sale to qualify as a long-term capital gain.

- Vieje Piauwasdy, Director of Equity Strategy, Secfi

Do you have a question about your stock options? Email us at ask@secfi.com