Under a Rhode Island law that took effect earlier this year, you generally qualify for the lowest possible capital gains tax rates if you sell an asset that you’ve held for more than five years. In other words, to get the best rates, the “holding period” must be longer than five years.

But what if you inherit an asset – such as stock or shares in a mutual fund – then sell? Where does the holding-period rule fit in?

That’s what a reader from Coventry was driving at in a question published in MoneyLine last month:

Q: [Regarding] liability for capital gain taxes, especially to the state of Rhode Island: If you were to receive stocks . . . and you were immediately going to sell them, is there a period of time you need to hold stocks for, to reduce your tax liability at the time of sale?

– C.M., Coventry

A: When that question first appeared, the answer wasn’t clear since the Rhode Island Division of Taxation was still developing an official policy.

Now there’s news: The agency has decided that, in such situations, you’ll be automatically assigned a “medium-term” holding period (as detailed below).

However, if you can prove that the overall holding period for the asset was actually greater than five years, you’ll be able to claim more favorable tax treatment under the “long-term” holding period rules (as detailed below).

This may seem like a lot of mumbo-jumbo. But it is important, because it has to do with how much in Rhode Island tax you’ll wind up paying. It’s confusing, because federal rules and Rhode Island rules differ on this point, said Mary F. Bernard, president of the Rhode Island Society of Certified Public Accountants.

To understand the impact, take a look at the following summaries. They show how the rules work regarding Rhode Island’s capital-gains tax rates. They also include the tax impact if you were to sell stock in a publicly traded company at a profit — a “gain” — of $10,000:

Short-Term: If you held the asset less than 12 months, you have a short-term gain, which is subject to regular Rhode Island income-tax rates — as high as 9.9 percent. So the most you’ll pay in Rhode Island tax is $990.

Medium-Term: If you held the asset for more than 12 months, but less than five years, you generally pay a maximum Rhode Island tax rate of 5 percent if you’re an upper-income taxpayer, 2.5 percent if you’re a lower-income taxpayer. So, in our example, you’ll owe a maximum of $500 in Rhode Island tax if you’re a higher-income taxpayer, or a maximum of $250 if you’re a lower-income taxpayer.

Long-Term: If you held the asset for more than five years, you pay a maximum tax rate of just 1.67 percent if you’re an upper income taxpayer, 0.83 percent (in other words, less than 1 percent) if you’re a lower income taxpayer. So, in our example, you’ll owe a maximum of $167 in Rhode Island tax if you’re a higher income taxpayer, or a maximum of $83 if you’re a lower income taxpayer.

Still with me? Then you probably realize that an important factor in figuring how much in Rhode Island tax you must pay is the length of time you hold an asset — in other words, the holding period.

How do you figure the holding period on an asset? Easy. If you bought the asset, you can figure it yourself, from your own records. If you received the asset as a gift, you generally use the donor’s holding period and tack it on to your own.

But what if you sell an asset that you’ve inherited? The answer wasn’t clear, until now.

Rhode Island will automatically assign you a holding period of more than one year, but less than five years, said Michael F. Canole, chief revenue agent for the Rhode Island Division of Taxation’s personal income-tax section.

In other words, the state tax agency’s default position is to treat the sale of such an asset under the “medium-term” rules outlined in the summaries above.

What if, in such a situation, you want to obtain Rhode Island’s most favorable capital-gains tax rates, under the “long-term” rules described above?

You’ll need evidence proving that the holding period is more than five years, Canole said in an interview at state tax agency headquarters in Providence last week.

In such a situation, you’ll be allowed to use the original owner’s holding period, and tack on your own holding period, he said. “What they’re saying is, you need to prove what the holding period was” in your hands and in the hands of the decedent, said Bernard, who is tax principal at Kahn Litwin Renza & Co., Ltd., a CPA firm in Providence.

For example, suppose that rich Uncle Pennybags bought stock in Hasbro in early October 2002.

He died in early January 2007, and the stock immediately transferred to you. You sold the stock early this month at a profit.

If you have evidence that the holding period exceeded five years, you’ll qualify for the lowest possible rates.

So, in this example, you’ll need documents to show that your uncle bought the stock on or before October 2002. You’ll also need documents to prove that you inherited the stock in January 2007, and held it for a number of months before selling.

These documents will therefore show that the overall holding period for that asset in this example — combing your uncle’s holding period and your holding period – was greater than five years. As a result, you’ll qualify for Rhode Island’s lowest possible capital-gains tax rates.

A few other points:

•When you inherit an asset, you typically get a “step up” in basis for federal and Rhode Island income-tax purposes. So in calculating your taxable gain in our example above, you’d generally use two figures: the amount you received upon selling the stock early this month, and the value of the stock on the date of your uncle’s death. The difference would be your taxable gain for federal and Rhode Island income-tax purposes.

•In the summaries listed above, you’re a “lower-income taxpayer” if your Rhode Island taxable income ordinarily falls within the state’s 3.75-percent bracket. That generally means you have $31,850 or so in Rhode Island taxable income if you’re single, or $53,150 or so in Rhode Island taxable income if you’re married and file a joint return. (In general, “taxable income” means your income reduced by such things as deductions and exemptions.)

•If you’re trying to decide when to sell an asset, consult a trusted financial adviser. In your deliberations, keep in mind that Rhode Island faces a big budget deficit for the current year and the coming year. Thus, the rules — and the rates — involving state capital gains taxes could change. “You need to have that in the back of your mind,” Bernard said. However, you should also keep in mind that there are other factors to consider when making such a decision, not just taxes, she said.

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