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. If you are in the 22% tax bracket, your short-term gains are taxed at 22%. If you are in the 37% bracket, they are taxed at 37%. There is no separate, lower rate for short-term gains.

This is the key difference between short-term and long-term gains. Long-term gains — from investments held over one year — get preferential rates of 0%, 15%, or 20%, depending on your income. Short-term gains get no such break. They stack on top of your other income and push you into a higher bracket if they are large enough.

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 15 of the next year, that is long-term. If you sell on January 14, it is short-term.

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 and filing status.
  • You must hold an investment for more than one year for the gain to may have access to as long-term and receive the lower preferential rates of 0%, 15%, or 20%.
  • Short-term gains are added to your other income for the year, which can push you into a higher tax bracket and increase the tax you owe overall.
  • You report short-term gains on Schedule D (Form 1040) and include them in your taxable income when you file your federal return.

How your tax bracket determines your short-term capital gains rate

The IRS sets tax brackets each year based on inflation. For 2024, the brackets for single filers range from 10% on the first $11,600 of income to 37% on income over $578,100. If you are married filing jointly, the brackets are wider — the top rate does not kick in until income exceeds $693,750. Your short-term gains are taxed at whatever bracket your total income falls into.

Here is how it works in practice: suppose you are single, earn $50,000 in salary, and sell a stock for a $10,000 short-term gain. Your total taxable income is now $60,000. That $10,000 gain is taxed at the marginal rate that applies to the $50,000 to $60,000 portion of your income. For 2024, that is the 22% bracket. You owe $2,200 in federal tax on the gain alone.

If instead you had held the stock for over a year, that same $10,000 would be taxed at the long-term rate. Depending on your income, that could be 0%, 15%, or 20% — meaning you would owe $0, $1,500, or $2,000 instead of $2,200. The difference compounds when you have multiple gains or larger amounts.

Why holding period matters more than you might think

The one-year threshold is strict and worth planning around. A stock you bought on March 1 becomes long-term on March 2 of the next year. Selling it on March 1 costs you the preferential rate; selling it on March 2 saves you money. For large gains, that difference can be thousands of dollars.

This is especially relevant if you are considering selling an investment that is close to the one-year mark. If you have a $50,000 gain and are in the 24% bracket, waiting one day could save you $2,500 in federal tax alone (the difference between 24% and 15%). State taxes may explore on top of that.

Some investors use this timing strategically. If you have a loss in one investment, you might sell it before the year ends to offset short-term gains from another investment, reducing your overall tax bill. This is called tax-loss harvesting. The losses and gains must be matched correctly on your return, so keep careful records of purchase and sale dates.

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

You report all capital gains and losses on Schedule D, which is part of Form 1040. Short-term gains go in Part I of Schedule D; long-term gains go in Part II. You list each transaction separately — the date you bought, the date you sold, the cost basis (what you paid), the sale price, and the gain or loss.

If you sold only one or two investments, this is straightforward. If you traded frequently or own mutual funds that distribute gains, your brokerage will send you a Form 1099-B or 1099-DIV that lists the transactions. You use these forms to fill in Schedule D. Many tax software programs can import this data directly from your brokerage.

After you complete Schedule D, the net total — short-term gains minus short-term losses, plus long-term gains minus long-term losses — flows to your Form 1040 as part of your total income. Short-term losses can offset short-term gains dollar-for-dollar, and any remaining loss can offset long-term gains or up to $3,000 of ordinary income in a single year.

What happens if you have more losses than gains

If your short-term losses exceed your short-term gains, you can use the excess to reduce your long-term gains. If you still have losses left over, you can deduct up to $3,000 against your ordinary income — wages, salary, interest, and so on — in a single tax year.

Any losses beyond $3,000 carry forward to future years. You can use them in the next year and every year after until they are exhausted. This is called a capital loss carryforward. Keep records of the amount you carried forward so you can claim it in future years.

Example: you have $8,000 in short-term losses and $2,000 in short-term gains. Your net loss is $6,000. You can deduct $3,000 against your ordinary income this year and carry the remaining $3,000 forward to next year.

State and local taxes on short-term capital gains

Federal tax is not the only tax you owe on short-term gains. Most states tax capital gains as ordinary income as well. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all. The rest tax short-term gains at their ordinary income rates, which vary widely.

California taxes short-term gains at rates up to 13.3%. New York taxes them at up to 10.9%. Some states have lower rates. If you live in a high-tax state and have large gains, the combined federal and state tax can be substantial. This is worth considering if you are thinking about the timing of a sale or whether to hold an investment longer.

A few states — including Maryland and Vermont — have attempted to tax long-term capital gains at a higher rate than ordinary income, though these laws have faced legal challenges. For now, assume your state taxes short-term gains at its ordinary income rate.

Short-term gains from different types of investments

The short-term capital gains rule applies to any investment you sell within one year: stocks, bonds, mutual funds, real estate, cryptocurrency, and collectibles. The rate is the same regardless of what you sold. If you bought Bitcoin in January and sold it in June, the gain is short-term and taxed at your ordinary rate, just like a stock gain would be.

Collectibles — art, coins, stamps, and similar items — have a special rule: long-term gains on collectibles are taxed at a maximum of 28%, not the usual 15% or 20%. But this only applies if you held them for over one year. Short-term gains on collectibles are still taxed at your ordinary rate.

Dividends and interest are not capital gains, even if you reinvest them. may have access to dividends from stocks are taxed at the long-term capital gains rates (0%, 15%, or 20%) regardless of how long you held the stock. Ordinary dividends and bond interest are taxed as ordinary income. Keep these separate from capital gains when you file.

Frequently Asked Questions

Can I avoid short-term capital gains tax by holding an investment for 366 days instead of 365?

No. The IRS counts the holding period as more than one year, which means you must hold the investment for at least one year plus one day. If you buy on January 1 and sell on January 1 of the next year, it is exactly one year and does not may have access to as long-term. You must sell on January 2 or later. The holding period starts the day after you buy.

What if I sell an investment at a loss within one year?

A short-term loss is treated the same way as a short-term gain for tax purposes — it is just negative. You can use short-term losses to offset short-term gains, then long-term gains, then up to $3,000 of ordinary income per year. Any remaining loss carries forward to future years.

Do I owe short-term capital gains tax if I sell an investment for less than I paid?

No. If you sell at a loss, you do not owe tax on the gain — because there is no gain. Instead, you can use the loss to reduce other gains or income, as described above. You must report the loss on Schedule D, but it reduces your tax bill rather than increasing it.

How do I know my cost basis if I inherited an investment?

Inherited investments receive a step-up in basis. Your cost basis becomes the fair market value on the date the person died, not what they originally paid. This means if you inherit a stock worth $100,000 and sell it the next day, you owe no capital gains tax, even though the original owner bought it for $10,000. Your brokerage should provide this information when you inherit the investment.

Are short-term capital gains subject to the net investment income tax?

Yes. If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you owe an additional 3.8% net investment income tax on capital gains, dividends, and certain other investment income. This applies to both short-term and long-term gains. The tax is reported on Form 8960 and added to your Form 1040.