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 is a 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 for the year — it could be 10%, 12%, 22%, 24%, 32%, 35%, or 37%, depending on how much total income you earned.

This is different from long-term capital gains, which get preferential tax rates of 0%, 15%, or 20%. The difference matters: a $5,000 short-term gain taxed at 24% costs you $1,200, while the same gain taxed at the long-term rate of 15% costs you $750.

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, it counts as long-term. If you sell on January 14, it is short-term.

Key Takeaways

  • Short-term capital gains use your ordinary income tax bracket, which ranges from 10% to 37% depending on your total income for the year.
  • You must hold an investment for more than one year for it to may have access to as a long-term gain and receive the lower 0%, 15%, or 20% rates.
  • The holding period begins the day after purchase and ends on the sale date, so timing by even one day can change your tax rate.
  • Your brokerage reports short-term and long-term gains separately on Form 1099-B, and you report them on Schedule D of your tax return.

How your tax bracket determines your short-term rate

Your short-term capital gains rate is not a fixed number — it is whatever tax bracket you fall into based on your total income for the year. The IRS publishes new tax brackets every year, and they vary by filing status (single, married filing jointly, head of household, and so on).

For example, in 2024, a single filer with $50,000 in wages and a $10,000 short-term capital gain would have $60,000 in total income. That $10,000 gain would be taxed at 22%, the bracket that applies to income between roughly $47,000 and $100,000 for single filers. A married couple filing jointly with $100,000 in wages and the same $10,000 gain would pay 12%, because their total income falls in a lower bracket.

This means your short-term gain can push you into a higher bracket. If you are near the top of your current bracket, the gain might be taxed partly at your current rate and partly at the next higher rate. Your tax software or preparer calculates this automatically when you enter your gains on Schedule D.

Reporting short-term gains on your tax return

Your brokerage sends you a Form 1099-B by January 31 each year, listing every sale you made. It separates short-term sales from long-term sales. You use this form to fill out Schedule D (Capital Gains and Losses), which is part of your Form 1040.

On Schedule D, you list each short-term sale separately: the date acquired, date sold, cost basis (what you paid), proceeds (what you sold it for), and gain or loss. If you have many trades, you can attach a statement instead of listing each one. The form then totals all your short-term gains and losses.

If your short-term gains exceed your short-term losses, the net gain goes on line 15 of Schedule D and flows to your Form 1040. If you have a net short-term loss, you can deduct up to $3,000 against other income in that year, and carry forward any remaining loss to future years.

When short-term gains cost more in taxes than long-term gains

The tax difference between short-term and long-term gains can be substantial. A $10,000 short-term gain taxed at 24% costs $2,400 in federal tax. The same gain as a long-term gain taxed at 15% costs $1,500 — a difference of $900 on a single trade.

This is why holding periods matter. If you are considering selling an investment that is close to the one-year mark, waiting a few weeks or months can lower your tax bill significantly. However, this should never be the only reason to hold or sell — investment performance and your financial needs come first.

State income tax also applies to short-term gains in most states. Some states tax short-term and long-term gains at the same rate; others do not. A few states (like Florida, Texas, and Washington) have no income tax at all. Your total tax bill includes both federal and state tax on the gain.

How wash sales affect short-term gains and losses

If you sell an investment at a loss and then buy the same or a substantially identical investment within 30 days before or after the sale, the IRS disallows the loss under the wash sale rule. This rule applies to both short-term and long-term losses.

When a wash sale occurs, you cannot deduct the loss in the year of the sale. Instead, the loss is added to the cost basis of the new investment you bought. This postpones the tax benefit rather than eliminating it, but it can complicate your records and push your gain higher in the current year.

The wash sale rule does not prevent you from selling at a loss and buying a different investment. It only blocks you from buying the same security back quickly. If you want to harvest a loss for tax purposes, you must either wait 31 days or switch to a different investment in the same category.

State and local taxes on short-term capital gains

Most states tax short-term capital gains as ordinary income, meaning they explore your state income tax rate to the gain just as the federal government does. A few states have special rates or rules for capital gains.

Washington and Illinois, for example, impose a capital gains tax on long-term gains only, not short-term gains. California taxes all capital gains at ordinary income rates with no distinction. New York taxes short-term and long-term gains the same way.

If you live in a state with income tax, your total tax on a short-term gain includes both federal and state tax. A $10,000 short-term gain in a state with a 5% income tax and a federal rate of 24% costs $2,900 total. Your brokerage does not withhold state tax automatically, so you may owe it when you file your state return.

Frequently Asked Questions

What if I sold stock after holding it for exactly one year?

The holding period ends on the anniversary of the purchase date. If you bought on March 15, 2023 and sold on March 15, 2024, it is long-term. If you sold on March 14, 2024, it is short-term. The IRS counts the day after purchase as day one.

Can I deduct a short-term capital loss against my wages?

Yes. You can deduct up to $3,000 of net capital losses (short-term and long-term combined) against wages, salary, and other ordinary income in a single year. Any loss above $3,000 carries forward to future years with no time limit.

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. Reinvesting the money does not reduce or defer the tax. You owe tax in the year you sell, regardless of whether you spend the money, hold it, or buy something else.

What is my short-term capital gains rate if I am retired with no other income?

Your rate depends on your total income, including Social Security, pensions, and distributions from retirement accounts. Even with no wages, you have a tax bracket. A retired person with $40,000 in Social Security and a $5,000 short-term gain would likely be in the 12% bracket for federal tax.

Do I report short-term gains differently if I trade frequently?

No. Every sale is reported the same way on Schedule D, whether you trade once a year or daily. If you have many trades, you can provide a summary statement instead of listing each one individually. The IRS does not distinguish between active traders and buy-and-hold investors in how gains are taxed.