A holding period is the length of time you own an asset before you sell it, and it decides whether your gain is taxed as short-term or long-term and whether tax breaks like the qualified small business stock exclusion apply.

Founders and early investors care because the holding period is often the difference between a high ordinary rate and a much lower long-term capital gains rate on the same shares. Small timing choices at grant can swing the tax dramatically.

Short-term versus long-term holding period

The core line is one year. Under IRC Section 1222(3), a long-term capital gain is gain on a capital asset held for more than 1 year. Sell at or before one year and the gain is short-term, taxed at ordinary income rates. Sell after more than one year and it qualifies as long-term capital gains, generally taxed at lower rates.

For most stock, whether bought at formation or in a later funding round, the holding period starts the day after you acquire the shares. That is straightforward when you buy or exercise and hold. It gets more nuanced with equity that vests over time.

How the holding period interacts with QSBS and 83(b)

Qualified small business stock has its own, longer clock. To exclude gain under IRC Section 1202, the shareholder generally must hold the stock for more than 5 years. Note a 2025 change: for QSBS acquired after July 4, 2025, Section 1202 phases in the exclusion, with partial exclusion available at 3 and 4 years and full exclusion at 5 years or more. Stock acquired on or before that date still uses the traditional 5-year rule. See qualified small business stock for the full test.

Vesting changes when the clock starts. If you receive stock subject to vesting and do nothing, the capital-gains holding period on each tranche generally begins only as it vests. An 83(b) election under IRC Section 83(b) changes that. By electing within 30 days of the grant, you are treated as owning all the stock now, so the capital-gains holding period, and the QSBS clock, start at grant rather than at each vesting date.

Example: a founder buys 1,000,000 shares of restricted stock at formation and files an 83(b) election. The full holding period starts on the purchase date. If the shares also qualify as QSBS and the founder holds long enough, the eventual sale can reach long-term capital gains and the Section 1202 exclusion sooner than without the election.

This is general information, not tax advice.