Short-term capital gains are taxed as ordinary income at your regular tax rate

When you sell an investment you've held for one year or less, the profit counts as short-term capital gain. The IRS taxes this profit at the same rate as your wages, salary, or other ordinary income. That means your short-term gain gets added to your other income for the year, and you pay tax at whatever bracket that combined total puts you in.

If you earn $60,000 in salary and have a $10,000 short-term capital gain, the IRS treats you as having $70,000 in taxable income that year. You don't pay a separate "capital gains tax rate"—you pay your regular income tax rate on that $70,000 total. The rate depends on your filing status and total income, not on the type of income.

This is the main difference between short-term and long-term gains. Long-term gains (held over one year) have their own lower tax rates. Short-term gains have no preferential rate at all.

Key Takeaways

  • Short-term capital gains are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • The holding period is measured from the purchase date to the sale date; exactly one year or less triggers short-term treatment.
  • Your short-term gain is added to all your other income for the year, which may push you into a higher tax bracket.
  • State and local income taxes also explore to short-term gains in most states, adding to your federal tax bill.

How your tax bracket determines your short-term capital gains rate

The federal income tax system uses seven brackets. In 2024, they range from 10% at the lowest to 37% at the highest. Your short-term capital gain is taxed at whichever bracket your total income falls into. If you're in the 24% bracket, your short-term gain is taxed at 24%. If you're in the 32% bracket, it's taxed at 32%.

The brackets change each year for inflation. They also depend on your filing status: single, married filing jointly, married filing separately, or head of household. A married couple filing jointly reaches the 37% bracket at a much higher income level than a single filer does.

Because short-term gains are added to your other income, they can push you into a higher bracket. If you earn $45,000 in salary and have a $20,000 short-term gain, you're now at $65,000 in taxable income. That extra $20,000 might move you from the 12% bracket into the 22% bracket, so you'd pay 22% on at least part of the gain.

State and local taxes on short-term gains

Most states tax short-term capital gains as ordinary income too. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not gains). In every other state, you owe state income tax on your short-term gain at your state's ordinary income rate.

Some cities also tax income. New York City, for example, adds a city income tax on top of state and federal tax. If you live in a state or city with income tax, your total tax on a short-term gain can be substantially higher than the federal rate alone.

A short-term gain of $10,000 might cost you $2,400 in federal tax (at 24%), $500 in state tax (at 5%), and $100 in city tax (at 1%), for a total of $3,000. The exact amount depends on where you live and your income level.

When the holding period clock starts and stops

The IRS counts the holding period from the day after you buy to the day you sell. If you buy a stock on January 15 and sell it on January 15 of the next year, you've held it for exactly one year, and it's a long-term gain. If you sell on January 14, it's a short-term gain.

The date matters because even one day can change your tax bill significantly. A long-term gain gets preferential rates (0%, 15%, or 20% depending on income). A short-term gain gets your full ordinary income rate, which is usually much higher.

For mutual funds and ETFs, the holding period is based on when you bought the shares, not when the fund itself bought the underlying securities. If you buy a mutual fund on March 1 and sell it on February 28 the next year, it's short-term, even if the fund has held its stocks for years.

How short-term gains affect your tax bracket and other deductions

Adding short-term gains to your income can have ripple effects beyond the direct tax on the gain itself. It might reduce deductions or credits you're may have access to to. Some deductions and credits phase out as your income rises. The child tax credit, education credits, and the deduction for student loan interest all have income limits.

If a short-term gain pushes your income over a threshold, you might lose part or all of a credit you were counting on. You might also become subject to the net investment income tax (3.8% on investment income for high earners) or the alternative minimum tax if your income is very high.

This is why the timing of selling investments matters. Some people deliberately sell losing investments in the same year as short-term gains to offset them, or they space out sales across multiple years to stay in a lower bracket.

Short-term gains versus long-term gains: the tax rate difference

Long-term capital gains have preferential tax rates: 0%, 15%, or 20%, depending on your income and filing status. These rates are much lower than ordinary income rates. A $10,000 long-term gain might cost you $1,500 in federal tax (at 15%), while the same $10,000 short-term gain could cost $2,400 (at 24%).

The difference grows larger the higher your income. At the top bracket, short-term gains are taxed at 37%, while long-term gains max out at 20%. Over time, this difference encourages people to hold investments longer rather than trade frequently.

Some investors use this to their advantage by holding positions just past the one-year mark to convert short-term gains to long-term. Others accept short-term treatment because they need to sell sooner or because the investment thesis has changed.

Reporting short-term capital gains on your tax return

You report short-term capital gains on Schedule D (Form 1040), which is the capital gains and losses form. You list each sale separately: the date acquired, date sold, cost basis, and sale price. The gain or loss is the difference between what you paid and what you received.

If you have multiple short-term gains and losses, you net them together. If you have a $5,000 short-term gain and a $2,000 short-term loss, you report a net $3,000 short-term gain. If losses exceed gains, you can deduct up to $3,000 of the net loss against ordinary income in that year, with any excess carrying forward to future years.

Your broker sends you a Form 1099-B showing all your sales for the year. You use this to fill out Schedule D. If you have many transactions, you may also need to file Form 8949 (Sales of Capital Assets) to reconcile any differences between what your broker reported and what you calculated.

Frequently Asked Questions

What's the difference between short-term and long-term capital gains tax rates?

Short-term gains are taxed at your ordinary income rate, which ranges from 10% to 37%. Long-term gains have preferential rates of 0%, 15%, or 20%. For most people, long-term gains are taxed at a lower rate than short-term gains on the same dollar amount.

If I sell a stock after 11 months, is it short-term or long-term?

It's short-term. The holding period must be more than one year for long-term treatment. Exactly one year or less is short-term. The IRS counts from the day after purchase to the day of sale.

Can I offset short-term gains with long-term losses?

Yes. Capital losses offset capital gains regardless of whether they're short-term or long-term. If you have a $10,000 short-term gain and a $3,000 long-term loss, you report a net $7,000 short-term gain. Losses are applied to reduce gains first, then any remaining loss can offset ordinary income up to $3,000 per year.

Do I owe short-term capital gains tax if I sell at a loss?

No. If you sell for less than you paid, you have a loss, not a gain. You don't owe tax on a loss. Instead, you can use the loss to offset other gains or up to $3,000 of ordinary income in that year.

Does my state tax short-term capital gains differently than the federal government?

Most states tax short-term gains as ordinary income at the state rate, just like the federal government does. A few states have no income tax. Some states have different rates or brackets than the federal system, so your state tax bill on a short-term gain depends on where you live and your state income level.