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 is a short-term capital gain. The IRS taxes this profit at the same rate as your wages, salary, or other regular income. That rate depends on your tax bracket — it could be 10%, 12%, 22%, 24%, 32%, 35%, or 37% for the 2024 tax year, depending on how much total income you earned.

This is different from long-term capital gains, which get preferential tax rates of 0%, 15%, or 20%. Because short-term gains use your ordinary income tax rate, they're almost always taxed more heavily than long-term gains on the same dollar amount.

The holding period matters. If you buy a stock on March 15 and sell it on March 14 the next year, it's a long-term gain. If you sell it on March 16, it's short-term. The IRS counts the day you buy as day one.

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 for the year.
  • You must hold an investment for more than one year for it to may have access to as a long-term gain and receive the lower tax rates of 0%, 15%, or 20%.
  • The IRS counts the purchase date as day one when determining whether you've held an investment long enough.
  • Short-term gains are added to your other income when calculating your tax bracket, which can push you into a higher rate.

How your tax bracket affects what you owe

Your short-term capital gain doesn't get its own separate tax rate. Instead, it's added to all your other income — wages, interest, dividends, rental income — and the total determines your tax bracket. If you earn $60,000 in wages and have a $10,000 short-term gain, you're taxed as if you earned $70,000 total.

This matters because tax brackets are progressive. Your first dollars of income are taxed at a lower rate, and each additional dollar is taxed at a higher rate. A $10,000 short-term gain might be taxed at 22% if it pushes you into that bracket, or at 24% if it pushes you higher. The exact rate depends on your filing status (single, married filing jointly, head of household) and your other income.

You can't separate short-term gains from the rest of your income to get a lower rate. The IRS treats them as regular income from the moment you report them.

State and local taxes on short-term gains

Federal tax is only part of what you owe. Most states also tax short-term capital gains as ordinary income. States like California, New York, and Massachusetts tax capital gains at the same rate as wages — sometimes 10% or higher. A few states, including Florida, Texas, and Wyoming, have no state income tax at all.

Some cities and counties add their own tax on investment income. New York City, for example, adds a local income tax that applies to capital gains. You'll owe this on top of federal and state tax.

The total tax on a short-term gain can easily reach 40% to 50% when you combine federal, state, and local rates. This is why holding an investment past the one-year mark often saves significant money.

How to report short-term gains on your tax return

You report short-term capital gains on Schedule D (Form 1040), which is the IRS form for all investment sales. Your brokerage will send you a Form 1099-B listing every sale you made during the year, including the purchase date, sale date, and proceeds. Use this to fill out Schedule D.

Schedule D separates short-term gains from long-term gains. You'll list each short-term sale on the short-term section, add them up, and then transfer the total to your main tax return (Form 1040). The total short-term gain is added to your other income and taxed at your ordinary rate.

If you have short-term losses, you can use them to offset short-term gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 of the net loss against your other income in that year. Any remaining loss carries forward to future years.

The difference between short-term and long-term rates

The tax savings from waiting one year can be substantial. Suppose you have a $10,000 gain and you're in the 24% federal tax bracket. If it's short-term, you owe $2,400 in federal tax. If it's long-term, you owe $1,500 (at the 15% long-term rate). That's a $900 difference on a single $10,000 gain.

The long-term rates — 0%, 15%, and 20% — are much lower than ordinary income rates. The 0% rate applies to lower-income filers, the 15% rate to most middle-income filers, and the 20% rate to high-income filers. These thresholds are different from the ordinary income brackets and are adjusted each year.

This is why many investors plan their sales around the one-year mark. Selling just before you hit the one-year anniversary can cost thousands in extra tax compared to waiting a few weeks.

What counts as a short-term holding period

The one-year rule applies to stocks, bonds, mutual funds, real estate, and most other investments. The holding period starts the day after you purchase the investment and ends the day you sell it. If you buy on January 15 and sell on January 15 the next year, it's a long-term gain. If you sell on January 14, it's short-term.

Some investments have special rules. If you inherit an investment, you get a "stepped-up basis" and the holding period resets — any sale is treated as long-term regardless of how long the original owner held it. If you receive stock as compensation from your employer, the holding period usually starts when you receive it, not when the company granted it to you.

Wash sales don't affect the holding period. If you sell a stock at a loss and buy it back within 30 days, the loss is disallowed, but the new purchase starts a fresh one-year clock.

Planning to minimize short-term gains tax

One strategy is to hold investments for at least one year and one day before selling. This straightforward timing change can cut your tax bill significantly. If you're considering selling an investment that's close to the one-year mark, waiting a few weeks might save more in taxes than you'd gain from selling sooner.

Another approach is to use losses to offset gains. If you have a short-term loss in one investment, you can sell it to offset a short-term gain in another. This is called "tax-loss harvesting." You reduce your taxable gain without changing your overall investment position.

You can also spread sales across multiple years. If you have a large gain, selling part of the investment this year and part next year spreads the gain across two tax years, potentially keeping you in a lower bracket each year.

Frequently Asked Questions

Do I have to pay short-term capital gains tax if I reinvest the money?

Yes. The tax is based on the profit you made, not on what you do with the money afterward. Whether you spend the proceeds, reinvest them, or leave them in cash, you owe tax on the gain in the year you sold the investment.

What if I have more short-term losses than gains?

You can deduct up to $3,000 of net losses against your other income in the current year. Any losses beyond that carry forward to future years and can be used to offset future gains or income.

Are short-term gains from cryptocurrency taxed differently?

No. The IRS treats cryptocurrency the same as stocks and other investments. A gain from selling crypto you held less than one year is taxed as a short-term capital gain at your ordinary income rate.

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

Yes. In a traditional IRA, Roth IRA, 401(k), or other may have access to retirement account, you don't pay capital gains tax on sales inside the account. You only pay tax when you withdraw money (and in a Roth IRA, may have access to withdrawals are tax-free).

What if I sell an investment at a loss — do I get a tax break?

You can use the loss to offset capital gains or up to $3,000 of other income. If your loss is larger than your gains and other income, the excess carries forward to reduce taxes in future years.