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

When you sell an investment you have owned 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 if you are in the 24% tax bracket, your short-term capital gain is taxed at 24%, not at the lower capital gains rate that applies to longer-held investments.

The key difference from long-term capital gains is timing. Hold an investment for more than one year, and the gain qualifies for preferential rates (0%, 15%, or 20%, depending on your income). Sell it within one year, and you lose that advantage. This is why the holding period matters so much—it directly changes how much tax you owe on the same dollar amount of profit.

Key Takeaways

  • Short-term capital gains are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your tax bracket.
  • The one-year holding period is measured from the purchase date to the sale date; selling on day 366 qualifies for long-term treatment, day 365 does not.
  • Short-term gains are added to your other income for the year, which can push you into a higher tax bracket and increase your overall tax bill.
  • You report short-term capital gains on Schedule D (Form 1040) and then transfer the total to your main tax return.

How the one-year holding period works

The IRS counts the holding period from the day after you buy the investment to the day you sell it. If you buy a stock on January 15 and sell it on January 15 of the following year, you have held it for exactly one year, and the gain qualifies as long-term. If you sell on January 14, it is short-term.

The holding period applies to each purchase separately. If you buy 100 shares in March and 100 shares in September, then sell the March shares in October, only those March shares are evaluated for the holding period. The September shares remain short-term until September of the next year.

This matters when you are selling part of a position. You can choose which shares to sell—the oldest first (FIFO), the newest first (LIFO), or specific identified shares—and the choice affects whether the gain is short-term or long-term. Your brokerage can help you specify which lot you are selling when you place the order.

What tax bracket applies to your short-term gains

Short-term capital gains stack on top of your other income for the year. If you earn $60,000 in salary and have a $10,000 short-term capital gain, your taxable income is $70,000. That $10,000 is taxed at whatever marginal rate applies to the $60,000–$70,000 range of your income.

For 2024, the federal tax brackets range from 10% at the lowest income level to 37% at the highest. Your short-term gain will be taxed at whichever bracket it falls into. If the gain pushes you into a higher bracket, part of it may be taxed at that higher rate. This is called bracket creep, and it can make short-term gains more expensive than they first appear.

State and local income taxes also explore to short-term capital gains in most states. Some states tax capital gains at the same rate as ordinary income; others have a separate capital gains tax. A few states do not tax capital gains at all. Check your state's rules, because state tax can add 5% to 13% to your federal bill depending on where you live.

How short-term gains differ from long-term gains

Long-term capital gains—profits from investments held more than one year—are taxed at preferential rates: 0%, 15%, or 20% at the federal level, depending on your income. These rates are much lower than ordinary income tax rates. A short-term gain in the same dollar amount can cost you significantly more in tax.

For example, suppose you have a $5,000 profit. If it is long-term and you are in the 24% ordinary income bracket, you owe $750 in federal tax (at the 15% long-term rate). If it is short-term, you owe $1,200 (at the 24% ordinary rate). The difference is $450 on the same profit, straightforward because of the holding period.

This is why many investors hold positions for at least one year before selling. The tax savings can be substantial, especially for high-income earners who face the top 37% ordinary rate but only the 20% long-term rate.

How to report short-term capital gains on your tax return

You report all capital gains and losses on Schedule D (Form 1040), which is part of your federal tax return. The form has two sections: one for short-term transactions and one for long-term. List each sale separately, showing the date acquired, date sold, cost basis, sale price, and gain or loss.

If your short-term gains exceed your short-term losses, the net goes to line 7 of Schedule D. From there, the total is carried to Form 1040 and added to your ordinary income. If you have both short-term and long-term transactions, the form combines them and shows a single net capital gain or loss.

Your brokerage sends you a Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) in January, which lists all your sales from the previous year. Use this form to fill out Schedule D. The IRS also receives a copy, so the numbers must match.

What happens if you have short-term losses

Short-term losses offset short-term gains dollar for dollar. If you have $8,000 in short-term gains and $3,000 in short-term losses, your net short-term gain is $5,000, and that is what gets added to your income.

If your short-term losses exceed your short-term gains, you can use up to $3,000 of the net loss to reduce your ordinary income in that year. Any loss beyond $3,000 carries forward to future years, where it can offset future gains or reduce future income by another $3,000 per year.

This is called loss harvesting—deliberately selling losing positions to offset gains elsewhere. It is a legitimate tax strategy, but the IRS has rules about repurchasing the same or substantially identical investment within 30 days before or after the sale. If you do, the loss is disallowed under the wash-sale rule.

State and local taxes on short-term gains

Most states tax short-term capital gains as ordinary income. New York, California, and Illinois, for example, explore their full income tax rate to capital gains. A few states—including Washington, Tennessee, and Florida—do not tax capital gains at all, though they may tax other forms of investment income like dividends.

Some states have introduced separate capital gains taxes that explore only to gains above a certain threshold. Washington State, for instance, taxes long-term capital gains on assets worth over $250,000 at a flat 7% rate. These taxes are relatively new and rules vary, so check your state's current law.

If you live in a high-tax state and trade frequently, the combined federal and state tax on short-term gains can exceed 40%. This is another reason many investors try to hold positions long enough to may have access to for preferential long-term treatment.

Frequently Asked Questions

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

Yes. The tax is based on the profit itself, not on what you do with the money afterward. If you sell a stock for a $5,000 gain and when ready buy another stock with the proceeds, you still owe tax on that $5,000 gain. Reinvesting does not defer or eliminate the tax.

What if I sell at a loss within one year?

Short-term losses reduce your short-term gains. If you have $2,000 in short-term gains and $3,000 in short-term losses, you have a net short-term loss of $1,000. You can use up to $3,000 of net losses to reduce your ordinary income, and any excess carries forward to future years.

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

Yes, if you can time the sale that way. Holding an investment for just over one year moves the gain from short-term (taxed at ordinary rates) to long-term (taxed at 0%, 15%, or 20%). The tax savings can be substantial, but only if you are comfortable holding the investment that long and the investment itself does not decline in value.

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

Yes. All capital gains, regardless of size, must be reported on Schedule D. The IRS receives a copy of your Form 1099-B from your brokerage, so the transaction is already on record. Failing to report it can trigger an audit notice.

How do I know my cost basis for calculating the gain?

Your cost basis is what you paid for the investment, plus any fees or commissions. Your brokerage tracks this and reports it on Form 1099-B. If you bought the investment long ago or through a transfer, you may need to dig up old statements. If you cannot find the original cost, the IRS allows you to use a reasonable estimate, but keep documentation in case you are audited.