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 gains. The IRS taxes this profit at the same rate as your wages, salary, or other ordinary income. That rate depends on your tax bracket — which depends on how much total income you earned that year.

This is different from long-term capital gains, which get preferential tax rates if you've held the investment for more than a year. Short-term gains receive no such break. If you're in the 24% tax bracket, short-term gains are taxed at 24%. If you're in the 12% bracket, they're taxed at 12%.

The federal tax brackets change each year and depend on your filing status (single, married filing jointly, head of household, and so on). Your state may also tax capital gains, though the rate and rules vary by state.

Key Takeaways

  • Short-term capital gains are taxed at your ordinary income tax rate, which ranges from 10% to 37% federally depending on your total income and filing status.
  • You calculate short-term gains by subtracting what you paid for an investment from what you sold it for, then report the profit on your tax return.
  • Your broker or investment platform will send you a Form 1099-B or similar document listing your sales; keep records of your original purchase price and date.
  • Some states tax capital gains at their own rates in addition to federal tax, while others do not tax capital gains at all.
  • If you have both short-term and long-term gains in the same year, they are taxed separately — long-term gains at preferential rates and short-term gains at ordinary rates.

How the federal tax brackets work for short-term gains

The IRS uses seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your short-term capital gains are added to your other income for the year, and the total determines which bracket you fall into. If your wages plus short-term gains total $47,150 as a single filer in 2024, you're in the 22% bracket, so your short-term gains are taxed at 22%.

The bracket thresholds change every year to account for inflation. A tax professional or tax software can tell you your exact bracket once you know your total income. The IRS website publishes the current year's brackets in April or May.

If your short-term gains push you into a higher bracket, only the income above the threshold is taxed at the higher rate. For example, if you're single and earn $45,000 in wages, then realize $5,000 in short-term gains, the first $2,150 of gains stays in the 22% bracket, and only the remaining $2,850 moves into the 24% bracket.

State taxes on short-term capital gains

Most states tax short-term capital gains as ordinary income using their own state income tax rates, which range from roughly 1% to 13% depending on the state. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so residents pay no state tax on capital gains.

California, New Jersey, and a handful of other states have introduced or are considering taxes specifically on long-term capital gains, but these typically do not explore to short-term gains. If you live in a state with income tax, your short-term gains are usually taxed at your state's ordinary income rate.

If you moved during the year you made the sale, you may owe tax to both your old state and your new state, depending on when the sale occurred and each state's rules. A tax professional in your state can clarify your situation.

How to calculate your short-term capital gain or loss

The calculation is straightforward: subtract your cost basis (what you paid for the investment, including commissions or fees) from your sale price (what you sold it for, minus commissions or fees). The result is your gain or loss.

If you bought 100 shares of a stock at $50 per share ($5,000 total) and sold them at $65 per share ($6,500 total), your short-term gain is $1,500. If you sold them at $45 per share ($4,500 total), you have a $500 short-term loss.

Short-term losses can offset short-term gains. If you have $3,000 in short-term gains and $2,000 in short-term losses in the same year, you report a net short-term gain of $1,000. If losses exceed gains, you can deduct up to $3,000 of the net loss against your ordinary income in that year, and carry forward any remaining loss to future years.

What documents you need to report short-term gains

Your broker or investment platform will send you a Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) or similar statement by January 31 of the year following the sale. This form lists each sale, the date, the proceeds, and sometimes the cost basis.

You report your short-term gains and losses on Schedule D (Capital Gains and Losses), which attaches to your Form 1040 tax return. If you use tax software, it will walk you through entering this information. If you file by hand or work with a tax preparer, you'll need to provide them with your 1099-B and any records showing your original purchase price and date.

Keep your own records of every purchase and sale — the date, number of shares or units, price per share, and total cost. If your broker's records don't match yours, your records are what the IRS will ask to see. Many investors keep a straightforward spreadsheet or photograph receipts from their brokerage account.

How short-term gains differ from long-term gains

The key difference is the tax rate. Long-term capital gains (investments held more than one year) are taxed at preferential rates: 0%, 15%, or 20% federally, depending on your income level. Short-term gains get no preference and are taxed at your ordinary rate, which can be as high as 37%.

This difference can be significant. If you're in the 24% bracket and have $10,000 in short-term gains, you owe $2,400 in federal tax. The same $10,000 in long-term gains might be taxed at 15%, costing only $1,500. The difference is $900 on that single transaction.

For this reason, many investors try to hold investments for at least one year before selling, if their financial situation allows it. However, if you need the money sooner or the investment is declining in value, the tax difference may not be the deciding factor.

What happens if you have both short-term and long-term gains in the same year

The IRS treats them separately. You report all short-term gains and losses on one part of Schedule D, calculate your net short-term result, then report all long-term gains and losses on another part and calculate your net long-term result. Each is taxed at its own rate.

If you have a net short-term loss and a net long-term gain, the loss does not reduce the long-term gain. Instead, you report both figures separately on your return. However, if you have a net loss overall (short-term loss exceeds short-term gain, and long-term gain is smaller), you can deduct up to $3,000 of the total loss against your ordinary income.

Tax software and tax preparers handle this calculation automatically, but understanding the separation helps you see why holding periods matter and why timing a sale can affect your tax bill.

Frequently Asked Questions

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

No. If you sell an investment for less than you paid, you have a capital loss, not a gain. You can use this loss to offset other gains or deduct up to $3,000 against your ordinary income in that year. Any loss beyond $3,000 carries forward to future years.

What if I day trade and have dozens of short-term trades in one year?

Each trade is a separate short-term transaction. Your broker will report all of them on your 1099-B, and you report the net gain or loss on Schedule D. If you trade frequently enough that it's your primary business, you may may have access to as a "trader" under IRS rules, which can change how you report income, but this is rare and requires specific criteria. Consult a tax professional if you trade actively.

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

Yes, if you can wait. An investment held for more than one year qualifies for long-term capital gains rates, which are usually lower. However, the holding period is measured from the purchase date to the sale date. If you bought on January 15, 2024, you must wait until January 16, 2025, to may have access to for long-term treatment. Selling on January 15, 2025, still counts as short-term.

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

Yes. The tax is based on the sale itself, not on what you do with the proceeds. If you sell an investment at a profit and when ready buy a different investment with the money, you still owe tax on the gain from the sale. Reinvesting does not defer or eliminate the tax.

What if my brokerage account is a 401(k) or IRA?

You don't report capital gains from trades inside a 401(k), traditional IRA, or Roth IRA on your tax return. The account itself is tax-deferred or tax-free, depending on the type. You only report gains when you withdraw money from the account (and even then, the tax treatment depends on the account type and your age). This is one reason retirement accounts are useful for frequent traders.