Short-term capital gains are profits you make when you sell an investment you've owned for one year or less, and they're taxed as ordinary income at your regular tax rate

When you buy a stock, bond, mutual fund, or other investment and sell it for more than you paid, that profit is called a capital gain. The tax you owe on that gain depends on how long you held it. If you owned the investment for 12 months or less before selling, the IRS treats your profit as a short-term capital gain, and you pay tax on it at the same rate as your wages or salary.

This matters because short-term rates are almost always higher than long-term rates. Someone in the 24% tax bracket on regular income pays 24% on short-term gains. The same person pays only 15% on long-term gains (profits from investments held more than one year). That difference adds up quickly on larger trades.

Key Takeaways

  • Short-term capital gains are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your income level.
  • You owe short-term tax on any investment profit from something you sold within 12 months of buying it.
  • The IRS counts the holding period from the day after you buy to the day you sell, and the one-year mark matters for whether you may have access to for the lower long-term rate.
  • You report short-term gains on Schedule D of your tax return, and they increase your taxable income dollar-for-dollar.
  • Holding an investment just past one year can cut your tax bill significantly, which is why the timing of a sale matters.

How the IRS counts your holding period

The IRS does not count the day you buy an investment. It starts counting the day after. So if you buy a stock on January 15, your holding period begins on January 16. If you sell on January 15 of the following year, you have held it for exactly one year and one day, which qualifies for long-term treatment.

If you sell on January 15 of the same year, you have held it for 364 days, and it is short-term. This one-day difference can mean hundreds or thousands of dollars in extra tax. Many investors deliberately wait a few extra days or weeks to cross the one-year line before selling a profitable position.

What tax rate you actually pay

Short-term capital gains use the same tax brackets as your regular income. In 2024, those brackets range from 10% at the lowest income level to 37% at the highest. Your short-term gain is added to your other income for the year, and the combined total determines which bracket you fall into.

This is different from long-term capital gains, which have their own lower brackets: 0%, 15%, or 20%, depending on your total income. A person in the 35% ordinary income bracket pays 35% on short-term gains but only 20% on long-term gains. For someone selling a $50,000 profit, that difference is $7,500 in tax.

How to report short-term gains on your tax return

You report all your investment sales on Schedule D, which is part of your federal tax return. Short-term gains go in one section, long-term gains in another. Your brokerage or investment firm sends you a Form 1099-B each January listing every sale you made the previous year, including the purchase date, sale date, and proceeds.

You use that form to fill out Schedule D. The IRS uses the dates on Form 1099-B to verify whether each sale qualifies as short-term or long-term. If you sold multiple investments, you list each one separately. At the bottom of Schedule D, you calculate your total short-term gain or loss and your total long-term gain or loss, then transfer those numbers to your main tax form.

Short-term losses can offset your gains

If you sell an investment for less than you paid, that is a capital loss. Short-term losses offset short-term gains first. If you have $8,000 in short-term gains and $3,000 in short-term losses, your net short-term gain is $5,000, and you pay tax only on that $5,000.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the net loss against your ordinary income. Any loss beyond that carries forward to future years. This is why some investors deliberately sell losing positions late in the year—to offset gains they made earlier and reduce their tax bill.

Why holding longer usually saves money

The difference between short-term and long-term rates creates a strong incentive to hold investments longer. Someone who buys a stock at $100 and sells it at $150 pays tax on a $50 gain. At the 24% short-term rate, that is $12 in tax. At the 15% long-term rate, it is $7.50. The longer holding period saves $4.50 on that single trade.

On a larger position—say a $10,000 gain—the difference is $900 in tax. Many investors use this fact to plan their sales. If you have a profitable investment and are thinking about selling, waiting a few weeks or months to cross the one-year line can be worth the wait, especially if the investment is unlikely to drop significantly in that time.

State and local taxes on short-term gains

Federal tax is not the only tax on your short-term gains. Most states tax capital gains as ordinary income, and some cities do as well. New York State, for example, taxes short-term gains at the same rate as wages. California does the same. A few states—including Florida, Texas, and Washington—have no state income tax at all, so residents pay only federal tax on gains.

State and local rates vary widely, from under 5% to over 13%. When you calculate the real cost of a short-term sale, add your state and local rate to your federal rate. Someone in California in the 35% federal bracket and the 13.3% state bracket pays 48.3% total tax on short-term gains. That same person pays 33.3% on long-term gains (20% federal plus 13.3% state).

Frequently Asked Questions

Does the holding period reset if I sell and buy the same stock again?

Yes. Each purchase starts a new holding period. If you buy a stock, sell it after six months, and buy it again the next day, your new holding period begins on that new purchase date. The IRS treats each transaction separately. This matters if you are trying to time a sale to reach the one-year mark.

What if I inherit an investment—does that count as short-term?

No. Inherited investments receive what is called a "stepped-up basis," meaning the IRS treats the value on the date of death as your purchase price. If you inherit a stock worth $100 on the date of death and sell it a month later for $105, you owe tax only on the $5 gain, and it is treated as long-term regardless of how long the deceased owner held it.

Can I avoid short-term capital gains tax by holding the investment in a retirement account?

Yes. Inside a traditional IRA, Roth IRA, 401(k), or other may have access to retirement account, you can buy and sell investments without triggering any capital gains tax. You pay tax only when you withdraw money from the account (or never, in the case of a Roth). This is one reason retirement accounts are powerful tools for frequent traders.

What if I have more losses than gains in a year?

You can deduct up to $3,000 of net capital losses against your ordinary income in a single year. Any loss beyond that carries forward to the next year and the years after, with no time limit. You can use those carried-forward losses to offset future gains or future ordinary income, $3,000 per year.

Do I have to report short-term gains if they are small?

Yes. The IRS requires you to report all capital gains, no matter how small. Your brokerage sends Form 1099-B to both you and the IRS, so the IRS already knows about the sale. Failing to report it can trigger an audit or penalty. Report every transaction, even if it is a $10 gain.