Short-term capital gain tax

A short-term capital gain is the profit from selling an investment—stock, bond, or other asset—that you held for one year or less. These gains are taxed at your ordinary marginal income tax rate, not at the preferential long-term rate. For most investors, short-term gains are the least tax-efficient way to realise returns.

Why holding period matters

The US tax code incentivizes long-term ownership. An asset sold within 365 days of purchase is treated as short-term; the moment you cross the one-year mark, it becomes long-term and eligible for preferential rates. This distinction can create a massive difference in after-tax returns.

A $100,000 gain taxed at 37% (your marginal rate, if you’re in the highest bracket) leaves you $63,000. The same gain taxed at the long-term rate of 20% leaves you $80,000. Waiting one year can be worth $17,000 on a six-figure gain—a powerful incentive to hold.

Where short-term gains come from

Short-term gains typically arise from active trading: buying and selling stocks, options, or other securities within a year. They also occur when you sell an asset that appreciated rapidly—for instance, if a stock you bought three months ago suddenly gains 30% after company news.

Traders and active investors are more likely to incur short-term gains. Passive, buy-and-hold investors, by contrast, rarely face short-term tax bills because they hold assets for years or decades.

Tax rate and your bracket

Short-term gains are added to your ordinary income and taxed at your marginal income tax rate. If you earn $150,000 a year and realise a $50,000 short-term gain, your taxable income becomes $200,000, and the gain is taxed at whatever bracket that $200,000 pushes you into.

The US federal tax brackets climb from 10% to 37% depending on income. State income tax, where applicable, stacks on top. Some states impose 10% or more; New York City imposes a combined 14.8% on top earners. Add a 3.8% net investment income tax if you’re wealthy, and the all-in rate can exceed 50%.

No preferential rate

Unlike long-term gains—which are taxed at just 0%, 15%, or 20% federally—short-term gains receive no special treatment. This is by design: the tax code wants to penalise short-term speculation and reward patient capital. The difference is striking: a middle-income investor in the 22% bracket will pay 22% on short-term gains but only 15% on long-term gains. That is a 31% reduction in the tax bill for waiting twelve months.

Interaction with cost basis

Your short-term gain depends on your cost basis method. If you bought the same security at different prices, you can choose which lot to sell via specific identification, FIFO, LIFO, or average cost. Minimizing the gain by choosing a high-basis lot can reduce your short-term tax bill.

Losses and offsets

Short-term losses offset short-term gains first, and any excess can offset long-term gains. Capital loss harvesting is often applied to short-term positions: if you have a short-term loss, you can realise it to offset gains elsewhere. The 30-day wash-sale rule restricts repurchase, but it applies equally to short-term and long-term positions.

Reporting

Short-term capital gains and losses are reported on Schedule D and Form 8949, along with long-term gains and losses. They are not reported separately to the IRS; the tax code simply applies the short-term rate to the sum of all short-term gains minus losses.

See also