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 and is taxed at the same rate as wages, salary, and other ordinary income. This means if you're in the 24% tax bracket, a short-term gain is taxed at 24%, not at the lower long-term capital gains rate of 15% or 20% that applies to investments held longer than a year.

The IRS treats short-term gains this way because the holding period is brief — the tax code assumes you're trading rather than investing for the long term. Your short-term gains are added to your other income for the year, and the combined total determines which tax bracket you fall into.

This matters most if you're actively buying and selling stocks, cryptocurrency, real estate, or other assets within a short window. A single large short-term gain can push you into a higher tax bracket and increase what you owe on all your income that year.

Key Takeaways

  • Short-term capital gains use your ordinary income tax rate, which ranges from 10% to 37% depending on your income and filing status.
  • A short-term gain is any profit from selling an asset you owned for one year or less, measured from the purchase date to the sale date.
  • Short-term gains are added to your wages and other income, so a large gain can push you into a higher tax bracket for the entire year.
  • Long-term capital gains (held over one year) are taxed at lower rates of 0%, 15%, or 20%, which is why holding period matters for tax planning.

How the IRS measures your holding period

The holding period starts on the day after you buy an asset and ends on the day you sell it. If you buy stock on March 15 and sell it on March 15 of the next year, you've held it for exactly one year, and the gain is long-term. If you sell on March 14 of the next year, it's short-term.

This rule applies to stocks, bonds, mutual funds, real estate, cryptocurrency, and any other capital asset. The date that matters is the settlement date — the day the transaction officially closes — not the day you place the order.

Wash sales complicate this for stocks and mutual funds. If you sell at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the IRS disallows the loss deduction. The holding period of the new purchase starts over, which can push a gain into short-term territory even if you thought you'd held it long enough.

What tax bracket your short-term gains push you into

Your short-term capital gains are stacked on top of your other income — wages, self-employment income, interest, dividends, and anything else you earned that year. The total determines your tax bracket.

For 2024, the ordinary income tax brackets range from 10% at the lowest to 37% at the highest. If you're single and earned $50,000 in wages, you're in the 22% bracket. If you then realize a $20,000 short-term capital gain, your taxable income becomes $70,000, which may push you into the 24% bracket. You'll owe 24% on the gain itself, and possibly 24% on some of your wages too, depending on where the bracket line falls.

This stacking effect is why a single large short-term gain can significantly increase your tax bill. A long-term gain would be taxed at 15% or 20% instead, a meaningful difference on large amounts.

State and local taxes on short-term gains

Federal tax is only part of the picture. Most states tax short-term capital gains as ordinary income as well, at rates ranging from 0% to over 13% depending on where you live.

Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — have no state income tax at all, so there's no state tax on short-term gains. New Hampshire taxes only interest and dividends, not capital gains.

If you live in a state with income tax, your short-term gain is taxed at your state's ordinary income rate in addition to the federal rate. California, for example, taxes short-term gains at rates up to 13.3%. New York City residents pay both state and city tax on top of federal tax. The combined rate can exceed 50% on very large short-term gains for high earners in high-tax states.

How to report short-term gains on your tax return

Short-term capital gains are reported on Schedule D (Capital Gains and Losses), which you attach to your Form 1040. You list each sale separately: the asset, the date acquired, the date sold, the purchase price, the sale price, and the gain or loss.

Your broker sends you a Form 1099-B showing all your sales for the year. The IRS receives a copy too, so your numbers must match. If you sold through multiple brokers, you'll receive multiple 1099-Bs and must report all of them.

After you list all your transactions on Schedule D, you calculate your total short-term gains and losses. Short-term losses can offset short-term gains dollar-for-dollar. If your short-term losses exceed your short-term gains, you can deduct up to $3,000 of the net loss against ordinary income in that year. Any remaining loss carries forward to future years.

The net short-term gain (or loss) then flows to your Form 1040, where it's added to your other income and taxed at your ordinary rate.

Short-term gains versus long-term gains in practice

The difference in tax rate between short-term and long-term gains can be substantial. Suppose you're single, earn $100,000 in wages, and realize a $50,000 capital gain. Your tax bracket is 24%.

If the gain is short-term, you owe 24% federal tax on it: $12,000. If the gain is long-term, you owe 15% federal tax on it: $7,500. The difference is $4,500 on a single transaction. Over many trades, the cumulative effect is large.

This is why many investors hold assets for at least one year before selling, even if they could sell sooner. The tax savings often outweigh the opportunity cost of waiting. However, if an asset is declining in value, selling within a year to lock in a loss (which can offset other gains) may make sense despite the short-term treatment.

How short-term gains affect other tax items

Adding short-term gains to your income can trigger or increase other tax consequences. If your total income crosses certain thresholds, you may become subject to the Net Investment Income Tax (3.8% on investment income for high earners), lose deductions that phase out at higher incomes, or become ineligible for certain credits.

For example, the Earned Income Tax Credit and the Child Tax Credit both phase out as income rises. A large short-term gain can reduce or eliminate these credits, increasing your tax bill beyond just the tax on the gain itself.

If you're self-employed or have other business income, short-term gains are also subject to self-employment tax in some cases, though capital gains are generally exempt. The interaction depends on whether the gains are from active trading (treated as business income) or passive investment.

Frequently Asked Questions

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

Yes. The IRS requires you to report all capital gains, regardless of size. Your broker reports them to the IRS on Form 1099-B, so the IRS knows about them. Failing to report creates a mismatch between your return and the IRS records, which triggers an audit notice.

Can I avoid short-term capital gains tax by holding the asset just over one year?

Yes, if you can wait. Holding an asset for one year and one day qualifies it for long-term treatment, which is taxed at 0%, 15%, or 20% instead of your ordinary rate. The tax savings often justify the wait, unless the asset is declining and you want to lock in a loss.

What if I have short-term losses — can I use them to offset short-term gains?

Yes, dollar-for-dollar. If you have $30,000 in short-term gains and $20,000 in short-term losses, your net short-term gain is $10,000, and that's what gets taxed. Excess losses can offset other income up to $3,000 per year, with the remainder carried forward.

Are short-term gains from cryptocurrency taxed differently?

No. Cryptocurrency is treated as property by the IRS. Gains from selling crypto you've held one year or less are short-term capital gains and taxed as ordinary income, just like stock gains. The same holding-period rules and tax rates explore.

Do I owe short-term capital gains tax if I reinvest the money?

Yes. The tax is based on the gain itself, not on what you do with the proceeds. If you sell an asset for a $10,000 profit and reinvest all $10,000 in another asset, you still owe tax on the $10,000 gain. Reinvesting does not defer or eliminate the tax.