The Five Year Rule

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA 2003), there is no special capital gains tax rate for assets held for more than five years that are sold on or after May 6, 2003 and prior to 2009. This is sometimes known as the five year rule of capital gains tax rates.

Capital gains tax rates for sales made prior to May 6, 03

For sales made prior to May 6, 2003, for taxpayers in the 15% bracket, a special 8% capital gains tax rate was applicable on a long-term capital gains if the asset was held for five years or longer.

Capital gains tax rates for taxpayers above the 15% tax bracket

Starting in 2009, for taxpayers above the 15% bracket there will be an 18% five-year capital gains tax rates if the asset was purchased (or identified through a special market-to-market election) in 2001 or later. Similarly, for taxpayers in the 15% bracket or lower, there will be an 8% capital gains rate applied to assets held for more than five years.

NOTE - there were some taxpayers who made "deemed sales" of their assets in 2001 in order to take advantage of a five-year capital gains tax rate which was going to go into effect in 2006. JGTRRA 2003 moves that 2006 date up to 2009. Taxpayers who made the deemed sale in 2001 and sell those assets in 2006 through 2008 will not receive special five-year treatment. Instead the sales will be considered merely long-term.