A couple of points.

Keep in mind, the UGMA or UTMA is the property of your grandchild until his age of majority, which will either be 18, 19 or 21, depending on your state. When he reaches this age (or a later age as defined in the UGMA if your state allows it), the assets are his to do with as he sees fit. Use by a parent for other reasons except for the exclusive benefit of the child has been considered theft by the courts.

But to your question:

Beginning in 2008, all realized investment gains, including capital gains from the sale of securities, will have the first $850 be tax free to the child (this represents the dependent child's standard deduction), the next $850 will be taxed at the child's rate and all additional investment income will be taxed at the parent's rate. Prior to 2008, this 'kiddie tax' ended when the child reached 18, at which time the all realized gains were taxed to the child. But new legislation has pushed the Kiddie tax up to age 24 for students who are still dependents. Take a look at this web site for a complete explanation:

http://www.forbes.com/opinions/2007/05/29/kiddie-tax-congress-oped-cx_to_0530onink.html

And yes, securities held longer than one year are long term capital gains in all taxable accounts.

BruceM