Short-term capital gains are profits from selling assets held for one year or less, taxed as ordinary income. The IRS taxes these gains at rates from 10% to 37%, depending on your tax bracket.
When you sell an asset like stocks, bonds, or real estate for a profit within a year of acquiring it, the gain is classified as short-term. The IRS treats these gains as ordinary income, meaning they're taxed at the same rates as your salary or wages.
Short-term capital gains apply to various assets, including:
For example, if you buy shares of a company and sell them six months later for a higher price, the profit is a short-term capital gain.
| Type | Holding Period | Tax Rate |
|---|---|---|
| Short-Term | Less than one year | Ordinary income rates (10%-37%) |
| Long-Term | One year or more | Lower rates (0%, 15%, or 20%) |
For instance, selling stocks held for over a year qualifies for long-term capital gains tax rates, which are generally lower. The IRS taxes short-term gains at your marginal tax rate, while long-term gains have their own tax brackets.
Many people confuse short-term capital gains with long-term capital gains. Short-term gains are taxed higher because they're considered ordinary income., some believe that only high-income earners pay these taxes, but short-term capital gains apply to anyone who sells an asset within a year.
Suppose you're in the 24% tax bracket and sell stocks for a $5,000 profit held for eight months. Your short-term capital gain is $5,000, and you'll owe $1,200 in taxes (24% of $5,000). If you had held the stocks for over a year, the tax rate would likely be lower.
To minimize short-term capital gains tax, consider holding assets for over a year to qualify for long-term capital gains tax rates. Tax-loss harvesting, where you offset gains with losses, can also reduce your taxable income. Consulting with a tax professional can help you improve your strategy.