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

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 gain at the same rate as your wages, salary, or other regular income — not at the lower long-term capital gains rates. That means your tax bracket determines what you pay, and short-term gains can push you into a higher bracket if they are large enough.

The federal tax brackets for 2024 range from 10% to 37%, depending on your total income and filing status. A short-term gain of $5,000 on a stock you sold after six months gets added to your other income for the year, and you pay tax on the combined total at whatever bracket that puts you in. This is very different from long-term gains, which have their own lower rates of 0%, 15%, or 20%.

State and local taxes also explore to short-term capital gains in most places. Some states tax capital gains as regular income; others have a separate capital gains tax. Your total tax bill includes federal tax plus whatever your state charges.

Key Takeaways

  • Short-term capital gains are taxed at your ordinary income tax rate, which ranges from 10% to 37% federally depending on your income and filing status.
  • The holding period that determines short-term versus long-term is exactly one year — sell on day 366 and the gain qualifies for lower long-term rates.
  • State taxes explore on top of federal tax in most states, and some states have their own capital gains tax separate from income tax.
  • A large short-term gain can push your total income into a higher tax bracket, raising the rate you pay on all your income in that bracket.

How the one-year holding period works

The line between short-term and long-term is the date you bought the investment. If you sell it within 365 days of purchase, it is short-term. If you sell it on day 366 or later, it is long-term. The IRS counts the holding period from the purchase date to the sale date, not calendar years.

This matters because the difference in tax rate is steep. A $10,000 short-term gain taxed at 37% costs you $3,700 in federal tax. The same $10,000 long-term gain taxed at 20% costs you $2,000. Waiting one day past the one-year mark can save you $1,700 on that single transaction.

Some investors deliberately hold positions past the one-year mark to capture the lower rate. Others sell before the year is up because they need the money or believe the price will fall. The holding period is entirely your choice — there is no penalty for selling early, only the higher tax rate.

Your tax bracket determines the exact rate you pay

The federal short-term capital gains rate is not a fixed number. It is your marginal tax bracket — the rate that applies to your highest dollar of income. For 2024, the brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Where you fall depends on your total income and whether you file as single, married filing jointly, head of household, or another status.

If you are single and earned $50,000 in wages, you are in the 22% bracket. A $5,000 short-term capital gain brings your total to $55,000, and you pay 22% federal tax on that $5,000 gain. If your gain is large enough to push you into the next bracket, part of it may be taxed at 24% instead.

The brackets shift slightly each year for inflation. The IRS publishes updated brackets in late 2023 for the following tax year. Check the current year's brackets on the IRS website or your tax software before calculating what you owe.

State and local taxes on short-term gains

Federal tax is only part of the bill. Most states tax capital gains as regular income, meaning your state income tax rate applies on top of the federal rate. If you live in a state with a 5% income tax and owe 22% federal tax on a short-term gain, your combined rate is 27%.

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not capital gains). If you live in one of these states, you pay only federal tax on short-term gains.

Some states have a separate capital gains tax that applies only to investment income, not wages. California, Washington, and a few others use this approach. The rate and rules differ by state, so check your state's tax authority website for the exact treatment in your location.

How short-term gains affect your overall tax bill

A short-term capital gain is added to your other income on your tax return, and the combined total determines your tax bracket. This can create a real cost if the gain pushes you into a higher bracket. Suppose you earned $40,000 in wages and are single. You are in the 12% bracket. A $20,000 short-term gain brings your total to $60,000, which puts you in the 22% bracket. You do not pay 22% on all $60,000 — only on the income above the 12% threshold — but the gain itself is taxed at the higher rate.

This is called bracket creep, and it is one reason some investors time their sales to spread gains across multiple years. If you can sell $20,000 worth of gains this year and $20,000 next year instead of $40,000 in one year, you may stay in a lower bracket both years.

Losses work in the opposite direction. If you have a short-term loss on one investment, you can use it to offset short-term gains on another. If losses exceed gains, you can deduct up to $3,000 of net losses against other income in a single year, and carry unused losses forward to future years.

The difference between short-term and long-term rates

Long-term capital gains — on investments held more than one year — are taxed at 0%, 15%, or 20% depending on your income level. These rates are much lower than ordinary income brackets. The 0% rate applies to long-term gains if your total income is below a certain threshold (roughly $47,000 for single filers in 2024). The 15% rate applies to most middle-income earners. The 20% rate applies to high-income filers.

Because long-term rates are fixed and lower, many investors structure their portfolios to hold positions past one year. A $50,000 long-term gain taxed at 15% costs $7,500 in federal tax. The same gain as short-term, taxed at 37%, costs $18,500. The difference is $11,000 — a powerful incentive to wait.

Short-term gains have no special rate. They are treated exactly like wages, bonuses, or self-employment income. This is why the holding period matters so much to your tax bill.

Reporting short-term capital gains on your tax return

You report short-term capital gains on Schedule D (Capital Gains and Losses) and then transfer the total to your Form 1040. Your brokerage or investment account sends you a Form 1099-B listing all your sales for the year, including the date purchased, date sold, and proceeds. You use this to calculate your gain or loss on each position.

If you sold through a brokerage, the firm usually calculates your cost basis (what you paid) and gain automatically. You can choose how to calculate basis — first in, first out (FIFO), specific identification, or average cost — and different methods can result in different gains. Keep records of your purchases and sales so you can support your numbers if the IRS asks.

If you have both short-term and long-term gains in the same year, you report them separately on Schedule D. Short-term gains are netted against short-term losses first, and long-term gains against long-term losses. Only then are the two groups combined to determine your net capital gain or loss for the year.

Frequently Asked Questions

What is the short-term capital gains tax rate for 2024?

There is no single short-term rate. You pay tax at your ordinary income tax bracket, which ranges from 10% to 37% federally. Your state may add additional tax. The exact rate depends on your total income and filing status.

Is there a way to avoid short-term capital gains tax?

You cannot avoid the tax, but you can reduce it by waiting to sell until you have held the investment for more than one year. Long-term gains are taxed at 0%, 15%, or 20% instead of your ordinary bracket rate. You can also offset gains with losses from other investments in the same year.

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

No. A loss means you sold for less than you paid, so there is no gain to tax. You can use the loss to offset other gains or deduct up to $3,000 against other income. Unused losses carry forward to future years.

How do I know if my gain is short-term or long-term?

Count the days from the date you bought the investment to the date you sold it. If it is 365 days or fewer, the gain is short-term. If it is 366 days or more, the gain is long-term. The holding period starts the day after you purchase.

Do I have to pay short-term capital gains tax on cryptocurrency?

Yes. The IRS treats cryptocurrency as property, not currency. When you sell crypto for a profit within one year of purchase, that gain is taxed as short-term capital gain at your ordinary income rate, just like stocks or bonds.