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

When you sell an asset you've owned for one year or less, the profit counts as short-term capital gain. The IRS taxes this gain using the same tax brackets that explore to your wages, salary, and other ordinary income. If you're in the 22% tax bracket, your short-term gains are taxed at 22%. If you're in the 37% bracket, they're taxed at 37%.

This is the key difference from long-term capital gains, which get preferential rates of 0%, 15%, or 20% depending on your income level. Short-term gains receive no preference — they stack on top of your other income for the year and push you into a higher bracket if they're large enough.

The holding period that determines short-term versus long-term is straightforward: you must own the asset for more than one year for it to may have access to as long-term. One day short of one year, and it's short-term. The IRS counts from the day after you buy to the day you sell.

Key Takeaways

  • Short-term capital gains use your ordinary income tax brackets, which range from 10% to 37% depending on your total income for the year.
  • The holding period is measured from the day after purchase to the day of sale; you must own the asset for more than one year to get long-term treatment.
  • Short-term gains are added to your other income, so a large gain can push you into a higher tax bracket and increase the tax on all your income in that bracket.
  • Self-employed people and business owners pay both income tax and the 3.8% Net Investment Income Tax on short-term gains if their income exceeds certain thresholds.

How short-term gains stack with your other income

The tax system works in layers. Your wages come first. Then your short-term capital gains are added on top. Then long-term gains, then other income. Each layer is taxed at the rate for that portion of your total income.

Example: You earn $60,000 in salary and sell a stock for a $15,000 short-term gain. Your taxable income is now $75,000. If you're single, the first $11,000 of that is taxed at 10%, the next $44,600 is taxed at 12%, and the remaining $19,400 is taxed at 22%. The short-term gain doesn't get its own rate — it just extends your income upward into whatever bracket it reaches.

This is why short-term gains can be expensive: a large gain can push you from the 22% bracket into the 24% bracket, meaning not only the gain itself but also some of your other income gets taxed at the higher rate.

Self-employment tax and the Net Investment Income Tax

If you're self-employed or own a business, short-term capital gains may also be subject to self-employment tax (Social Security and Medicare), which adds 15.3% on top of income tax. This applies only if the gain is considered business income — for example, if you're a day trader or if the asset is inventory in your business. A one-time stock sale usually doesn't trigger self-employment tax, but a pattern of frequent trading might.

Additionally, if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you owe the Net Investment Income Tax, which is 3.8% on investment income including short-term gains. This is a separate tax from income tax and self-employment tax, not a replacement for either.

The combination of income tax, self-employment tax, and Net Investment Income Tax can push your total rate on short-term gains above 50% in high-income situations. This is why the holding period matters so much — waiting just one day longer can cut your tax rate dramatically.

State and local taxes on short-term gains

Most states tax short-term capital gains as ordinary income, using their own tax brackets. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all. Others, like California, have high state rates that explore to short-term gains just as they do to wages.

Some cities and counties also impose local income taxes that explore to capital gains. New York City, for example, taxes short-term gains at the same rate as ordinary income. These vary widely by location, so your total tax on a short-term gain can range from federal income tax alone (in no-income-tax states) to federal plus state plus local plus self-employment tax plus Net Investment Income Tax.

When short-term gains matter most

Short-term capital gains are most common in active trading, real estate flips, and cryptocurrency sales. If you buy and sell a rental property within a year, the profit is short-term. If you trade stocks frequently, your gains are short-term. If you receive stock options and sell the shares within a year of exercise, that's short-term.

The tax cost of short-term treatment can be substantial. A $50,000 short-term gain taxed at 37% federal plus 13.3% California state plus 3.8% Net Investment Income Tax costs $27,315 in tax. The same gain held for more than one year and taxed at the 20% long-term rate costs $10,000. The difference is $17,315 — a powerful incentive to hold assets longer when you can.

Losses and short-term gains

Short-term capital losses can offset short-term capital gains dollar-for-dollar. If you have a $10,000 short-term gain and a $6,000 short-term loss in the same year, you report a net $4,000 short-term gain. This is why some investors deliberately harvest losses — selling losing positions to offset gains and reduce tax.

If your short-term losses exceed your short-term gains, you can use up to $3,000 of the excess loss to offset ordinary income in that year. Any remaining loss carries forward to future years. Long-term losses work the same way, but short-term and long-term are tracked separately.

Reporting short-term gains on your tax return

Short-term capital gains are reported on Schedule D (Capital Gains and Losses), which you attach to Form 1040. You list each sale separately: the date acquired, date sold, cost basis, sale price, and gain or loss. Your broker sends you a Form 1099-B showing these transactions, which you use to fill out Schedule D.

The total of all your short-term gains and losses goes on line 1 of Schedule D. This net amount then transfers to your Form 1040, where it's added to your ordinary income. If you have both short-term and long-term gains, they're reported separately on Schedule D, but they all end up on your 1040 as part of your total income.

Frequently Asked Questions

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

No, but you can defer it by holding the asset longer than one year. You can also offset short-term gains with short-term losses from other sales in the same year. Some retirement accounts like 401(k)s and IRAs allow you to buy and sell without triggering any capital gains tax, but you can't withdraw the money without penalties until you reach retirement age.

What if I sell a stock at a loss within a year?

A short-term loss reduces your short-term gains dollar-for-dollar. If you have no gains, you can deduct up to $3,000 of the loss against your ordinary income. Any loss beyond that carries forward to next year. This is true whether the loss is short-term or long-term.

Do I owe short-term capital gains tax if I sell inherited property within a year?

No. Inherited property gets a "step-up in basis," meaning your cost basis is the value on the date of death, not what the original owner paid. If you sell shortly after inheriting, you likely have little or no gain, even if the original owner bought it decades earlier. This is one of the few situations where the holding period resets.

How do I know my tax bracket for short-term gains?

Your short-term gains are taxed at whatever bracket your total income falls into. If your salary, wages, and other income put you in the 24% bracket, your short-term gains are taxed at 24%. The IRS publishes tax bracket tables each year based on filing status and income level. Your tax software or a tax professional can calculate which bracket applies to you.

Can I reduce short-term capital gains tax by donating the stock instead of selling it?

Yes. If you donate appreciated stock to a may have access to charity, you avoid the capital gains tax entirely and get a charitable deduction for the full fair market value. This works for both short-term and long-term gains. You must donate the stock itself, not the proceeds from selling it, for this to work.