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

When you sell an investment you've held for one year or less, the profit counts as short-term capital gain and gets taxed at your ordinary income tax rate — not at the lower long-term capital gains rates. This means if you're in the 24% federal tax bracket, your short-term gains are taxed at 24%. If you're in the 12% bracket, they're taxed at 12%.

The difference between short-term and long-term matters because long-term gains (assets held over one year) get preferential rates of 0%, 15%, or 20% depending on your income. Short-term gains get no such break. This is why the holding period — whether you own something for 366 days or 365 days — can mean thousands of dollars in tax difference on the same sale.

Your state may also tax short-term gains. Most states treat them the same as ordinary income and add their own tax on top of the federal rate. A few states have no income tax at all, which affects your total bill.

Key Takeaways

  • Short-term capital gains are taxed at your federal income tax bracket rate, which ranges from 10% to 37% depending on your income and filing status.
  • The one-year holding period is the dividing line: sell before one year and you pay ordinary income rates; sell after one year and you may may have access to for the lower 0%, 15%, or 20% long-term rates.
  • State income tax applies to short-term gains in most states, adding another layer of tax on top of the federal rate.
  • Short-term gains are added to your other income for the year, which can push you into a higher tax bracket and increase your overall tax bill.

How the one-year holding period works

The IRS counts the holding period from the day after you buy an asset to the day you sell it. If you buy stock on January 15 and sell it on January 15 of the next year, that's exactly one year and the gain is long-term. If you sell on January 14, it's short-term.

This applies to stocks, bonds, mutual funds, real estate, cryptocurrency, and most other investments. The exception is certain collectibles and Section 1202 small-business stock, which have different rules. For most people, the one-year line is the one that matters.

The holding period resets if you sell and buy back the same security. Selling at a loss and buying the same stock again within 30 days triggers the wash-sale rule, which disallows the loss and extends your holding period. This rule prevents you from harvesting losses for tax purposes while keeping your investment position.

How short-term gains stack with your other income

Short-term capital gains don't get their own tax calculation. Instead, they're added to your wages, self-employment income, and other ordinary income, and the total is taxed at your bracket rate. This stacking effect can push you into a higher bracket than you'd be in without the gain.

Example: You earn $50,000 in wages and sell stock for a $15,000 short-term gain. Your taxable income is now $65,000. If you're single and that $65,000 puts you in the 22% bracket instead of the 12% bracket you'd be in at $50,000, the short-term gain is taxed at 22%, not 12%.

This is different from long-term gains, which are taxed in their own brackets and don't push your ordinary income into a higher rate. That's another reason holding for over one year often saves money.

State and local taxes on short-term gains

Most states tax short-term capital gains as ordinary income. If your state has a 5% income tax, you'll owe 5% on top of the federal rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all, so you only pay federal.

Some states have different rates for capital gains than for wages. California, for example, taxes all capital gains (short and long) as ordinary income with no preferential rate. New York taxes short-term gains as ordinary income but has a separate tax on long-term gains for high earners. Check your state's rules because the state portion can be substantial.

A few cities also tax capital gains. New York City, for instance, adds a city income tax on top of state and federal. If you live in a high-tax state or city, the combined rate on short-term gains can exceed 50%.

When short-term gains trigger the net investment income tax

If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you may owe an additional 3.8% net investment income tax on short-term capital gains. This is a federal tax separate from your ordinary income tax and applies to the lesser of your net investment income or the amount by which your income exceeds the threshold.

This tax was created as part of the Affordable Care Act and applies to capital gains, dividends, interest, and certain other investment income. It's straightforward to overlook because it doesn't show up in your regular tax bracket — it's calculated separately on Form 8960.

If you're close to the threshold, a large short-term gain can push you over and trigger this tax. Planning the timing of sales can sometimes help you avoid or defer this extra tax, though the one-year holding period is usually the bigger factor.

Trading activity and the wash-sale rule

If you sell a stock at a loss and buy the same or a substantially identical stock within 30 days before or after the sale, the wash-sale rule disallows the loss. The loss is added to the cost basis of the new shares instead, which defers the tax benefit to a later year.

This rule prevents rapid trading strategies that sell losers for tax deductions while keeping the same economic position. It applies to stocks, mutual funds, and ETFs of the same fund. It does not explore to bonds or different securities, even if they're in the same sector.

Traders who buy and sell frequently often hit wash-sale issues without realizing it. If you're managing losses for tax purposes, track your trades carefully and wait 31 days before repurchasing if you want the loss to count in the current year.

Frequently Asked Questions

What's the difference between short-term and long-term capital gains tax rates?

Short-term gains are taxed at your ordinary income bracket rate (10% to 37%). Long-term gains are taxed at preferential rates of 0%, 15%, or 20% based on income. The holding period is one year: sell before one year and you pay ordinary rates; sell after and you may pay the lower long-term rate.

If I hold an investment for exactly one year, is the gain long-term?

No. The IRS counts from the day after purchase. If you buy on January 15 and sell on January 15 the next year, that's exactly one year and qualifies as long-term. If you sell on January 14, it's short-term. The 366th day is the first day of long-term treatment.

Do I have to report short-term gains if they're small?

Yes. All capital gains, short and long, must be reported on your tax return regardless of size. You report them on Schedule D and Form 8949. The IRS matches your reports to broker statements, so underreporting is easily detected.

Can I deduct short-term capital losses against my wages?

Capital losses (short or long) can offset capital gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income like wages. Any loss above $3,000 carries forward to future years.

Does day trading count as short-term capital gains?

Yes, unless you're classified as a professional trader. Most day traders pay short-term rates on all gains. If the IRS determines you're a trader (not an investor), you may be able to use mark-to-market accounting, which has different rules. This is rare and requires specific facts and circumstances.