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 — not at the lower capital gains rates. That means your tax bracket determines what you owe, not a special capital gains bracket.

If you're in the 22% tax bracket, short-term gains are taxed at 22%. If you're in the 37% bracket, they're taxed at 37%. This is different from long-term capital gains, which have their own lower tax rates (0%, 15%, or 20%, depending on your income).

The difference matters most for active traders or people who sell inherited property, real estate, or investments quickly. A $10,000 short-term gain costs far more in tax than a $10,000 long-term gain in the same year.

Key Takeaways

  • Short-term capital gains use your ordinary income tax rate, which ranges from 10% to 37% depending on your filing status and total income.
  • Holding an investment for more than one year before selling it converts the gain to long-term status, which qualifies for lower tax rates.
  • Your short-term gains are added to your other income for the year, which can push you into a higher tax bracket.
  • State income tax also applies to short-term gains in most states, on top of the federal tax you owe.

How your tax bracket determines the rate you pay

The IRS uses tax brackets based on your filing status (single, married filing jointly, head of household, or married filing separately) and your total income for the year. Short-term capital gains are added to your other income — wages, interest, dividends — and the combined total determines which bracket you fall into.

For 2024, the federal tax brackets range from 10% at the lowest income level to 37% at the highest. If you earn $50,000 in wages and realize a $15,000 short-term gain, your taxable income is $65,000. That $65,000 determines your bracket, and the short-term gain is taxed at whatever rate applies to that bracket.

This "stacking" effect means a short-term gain can push you into a higher bracket than you'd be in without it. A $20,000 gain might be taxed partly at 22% and partly at 24% if it crosses a bracket boundary.

State and local taxes on short-term gains

Federal tax is only part of what you owe. Most states tax short-term capital gains as ordinary income too, using their own state tax rates. State rates vary widely: some states have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming), while others tax capital gains at rates up to 13% or higher.

A few states — California, Hawaii, Illinois, Iowa, and Vermont — have special taxes on capital gains beyond their regular income tax, though these typically explore only to long-term gains or gains above a certain threshold. Check your state's tax authority website or a tax professional to learn your state's rules.

Some cities and counties also impose local income tax. New York City, for example, adds a local tax on top of state and federal rates. The total tax on a short-term gain can easily reach 40% to 50% in high-tax states and cities.

When the one-year holding period matters most

The difference between short-term and long-term treatment hinges on a single date: whether you held the investment for more than one year before selling it. "More than one year" means you must own it for at least 366 days (or 367 in a leap year). Selling on day 365 still counts as short-term.

This rule applies to stocks, bonds, mutual funds, real estate, cryptocurrency, and most other investments. The holding period starts the day after you buy and ends the day you sell. If you buy on January 15 and sell on January 16 of the next year, you've held it more than one year and may have access to for long-term treatment.

For inherited property, the holding period is usually reset: you inherit it on the date of the previous owner's death, and that becomes your starting date. This means inherited assets often may have access to for long-term treatment even if you sell them within weeks.

How short-term gains interact with other income and deductions

Short-term capital gains don't get any special ordering or treatment when combined with your other income. They're straightforward added to wages, self-employment income, interest, dividends, and any other taxable income you have. The total is your taxable income before deductions.

If you have capital losses — from selling investments at a loss — you can use them to offset capital gains. A $5,000 short-term loss reduces your short-term gains by $5,000. If losses exceed gains, you can deduct up to $3,000 of the excess loss against ordinary income in that year, with any remaining loss carried forward to future years.

Standard deductions and itemized deductions reduce your taxable income after capital gains are added in. A larger deduction lowers the income amount that gets taxed, but it doesn't change the rate applied to short-term gains themselves.

Reporting short-term gains on your tax return

When you sell an investment, your broker sends you a Form 1099-B (or 1099-S for real estate) showing the sale price and your cost basis. You report this information on Schedule D (Capital Gains and Losses), which is part of your Form 1040 federal tax return.

Schedule D separates short-term gains and losses from long-term ones. You list each transaction: the asset sold, the date acquired, the date sold, the sale price, and the cost basis. The form then calculates your net short-term gain or loss and your net long-term gain or loss.

If you have a net short-term gain, it goes to line 15 of your Form 1040 and is taxed as ordinary income. If you have a net short-term loss, it can offset short-term gains first, then long-term gains, then up to $3,000 of ordinary income.

Frequently Asked Questions

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

No. A loss means you sold for less than you paid, so there's no gain to tax. You can use the loss to offset other gains or up to $3,000 of ordinary income in the same year. Any unused loss carries forward to future years.

What if I buy and sell the same stock multiple times in one year?

Each transaction is separate. If you buy 100 shares in March and sell them in July, that's a short-term gain or loss. If you buy 100 different shares in September and sell them in December, that's another short-term transaction. All short-term gains and losses for the year are combined on Schedule D.

Can I avoid short-term capital gains tax by holding an investment just past one year?

Yes, if you can wait. Holding an investment for more than one year converts the gain to long-term status, which qualifies for lower federal tax rates (0%, 15%, or 20% instead of your ordinary rate). The tax savings can be substantial, but only if you're comfortable holding the investment longer.

Do I pay short-term capital gains tax on cryptocurrency?

Yes. The IRS treats cryptocurrency like any other investment. If you sell crypto you've held for one year or less, the gain is taxed as short-term capital gain at your ordinary income rate. Holding for more than one year qualifies for long-term rates.

What happens to short-term gains if I'm self-employed?

Short-term capital gains are added to your self-employment income and other income for the year. They're subject to federal income tax at your ordinary rate, but they're not subject to self-employment tax (Social Security and Medicare tax). Only self-employment income from a business or trade triggers self-employment tax.