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

When you sell an investment you have held 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 rate depends on your tax bracket — it could be 10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2024, depending on how much you earned that year.

This is different from long-term capital gains, which get lower tax rates (0%, 15%, or 20%) if you held the investment for more than a year. The difference matters: a short-term gain on the same dollar amount can cost you significantly more in taxes than a long-term gain would.

Your tax bracket is determined by your total income for the year, including wages, interest, dividends, and these capital gains. A short-term gain pushes your total income higher, which can move you into a higher bracket and increase the tax rate on all your income.

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 for the year.
  • You owe tax on short-term gains even if you reinvest the money or do not withdraw it from your brokerage account.
  • State income tax applies to short-term capital gains in most states, adding 3% to 13% or more to your federal rate.
  • Losses on investments held one year or less can offset short-term gains dollar-for-dollar, reducing your tax bill.
  • The difference between short-term and long-term rates can save you thousands of dollars on the same profit if you wait past the one-year mark.

How your tax bracket determines your rate

The IRS sets tax brackets each year based on inflation. In 2024, a single filer in the 22% bracket earns between roughly $47,150 and $100,525. A married couple filing jointly in that same bracket earns between roughly $94,300 and $201,050. These numbers change yearly.

When you add a short-term capital gain to your income, it stacks on top of what you already earned. If you earned $95,000 as a single filer and sold stock for a $10,000 gain, your taxable income becomes $105,000. That pushes you from the 22% bracket into the 24% bracket. You would owe 24% on the $10,000 gain, not 22%.

You can find the current tax brackets on the IRS website or ask a tax professional. The brackets are published each January and explore to income earned that calendar year.

State and local taxes on top of federal

Most states tax capital gains as ordinary income too. California, New York, and Massachusetts charge between 9% and 13% on top of your federal rate. Some states charge less — Florida, Texas, and Wyoming have no state income tax at all. A few states tax capital gains differently than wages, but most treat them the same way.

A handful of cities also tax income. New York City adds roughly 3.9% to 4.5% depending on your income level. If you live in a state or city with income tax, add that percentage to your federal rate to see your total tax cost.

Check your state's tax authority website or a tax professional to confirm the rate in your location, since rates change and some states have different rules for residents versus nonresidents.

When you owe tax on the gain

You owe federal income tax on short-term capital gains in the year you sell the investment, even if you do not withdraw the money from your brokerage account. The tax is due when you file your return the following spring, unless you make estimated tax payments during the year.

If you sell multiple investments in the same year, you add up all the gains and losses. Short-term losses reduce short-term gains dollar-for-dollar. If you have $5,000 in short-term gains and $2,000 in short-term losses, you report $3,000 in net short-term gain.

If your losses exceed your gains, you can deduct up to $3,000 of the excess loss against other income that year. Any loss beyond that carries forward to future years, where you can use it to offset future gains or income.

The difference between holding periods

The one-year holding period is measured from the day you buy to the day you sell. If you buy on March 15 and sell on March 14 the next year, it counts as short-term because you have not held it for a full year. If you sell on March 16, it counts as long-term.

Long-term capital gains are taxed at 0%, 15%, or 20% depending on your income level — rates that are much lower than ordinary income brackets. On a $10,000 gain, the difference between short-term (24%) and long-term (15%) rates is $900. On larger gains, the difference grows quickly.

This is why many investors wait past the one-year mark before selling, especially if they are close to the threshold. The tax savings often outweigh the cost of holding an investment a few more weeks or months.

Reporting short-term gains on your tax return

Your brokerage sends you a Form 1099-B in January showing all the sales you made that year, including the purchase price, sale price, and holding period. You use this form to calculate your gain or loss for each sale.

You report short-term gains and losses on Schedule D (Form 1040), which is part of your federal income tax return. The IRS uses this form to match your reported gains against the 1099-B your brokerage sent them.

If you use tax software, it usually imports the 1099-B data automatically. If you work with a tax professional, bring the 1099-B and any records of sales the brokerage did not report (such as sales from accounts at other firms).

How to reduce short-term capital gains tax

The most direct way is to hold investments longer than one year so they may have access to for long-term rates. If you cannot wait, you can offset gains with losses — selling losing positions to reduce your net gain for the year.

You can also donate appreciated securities to charity instead of selling them. You avoid the capital gains tax entirely and get a deduction for the full fair market value of the donation. This works best for large gains and requires the investment to have appreciated.

Contributing to retirement accounts like a 401(k) or traditional IRA reduces your ordinary income, which can lower your tax bracket and reduce the rate applied to your short-term gains. However, this does not directly reduce the tax on the gains themselves.

Frequently Asked Questions

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 stock for a $5,000 profit and when ready buy a different stock with that $5,000, you still owe tax on the $5,000 gain. The IRS taxes the transaction, not the destination of the money.

What if I sell at a loss — can I use that to reduce my taxes?

Yes. Short-term losses offset short-term gains dollar-for-dollar. If you have $8,000 in gains and $3,000 in losses, you report $5,000 in net gain. If losses exceed gains, you can deduct up to $3,000 against other income that year, with any excess carrying forward to future years.

Is the short-term rate the same as my income tax bracket?

Yes, exactly the same. Short-term capital gains are added to your ordinary income and taxed at your marginal tax rate. If you are in the 24% bracket, short-term gains are taxed at 24%. If the gain pushes you into a higher bracket, the rate on the gain is the higher rate.

Do I have to pay estimated taxes on short-term gains during the year?

You should if the gain is large enough to create a significant tax bill. If you expect to owe $1,000 or more in taxes for the year, the IRS recommends making quarterly estimated payments. Failure to pay can result in penalties, though the penalty is usually small if your total tax is close to what you paid through withholding.

Can I avoid short-term capital gains tax by holding the investment in a retirement account?

Yes. Investments inside a traditional IRA, 401(k), or Roth IRA are not subject to capital gains tax when you sell them, even if you hold them for less than a year. You only pay tax on withdrawals from traditional accounts, and Roth withdrawals are tax-free if you follow the rules.