Short-Term Capital Gain

Dec 17

Short-Term Capital Gain: Income from Assets Held for a Year or Less

A short-term capital gain is the profit realized from selling a capital asset, such as stocks, bonds, or real estate, that was held for one year or less. These gains are taxed at the seller’s ordinary income tax rate, which can be significantly higher than the tax rates applied to long-term capital gains.

Short-term capital gains occur when the sale price of the asset exceeds its purchase price, and the holding period is crucial in determining whether a gain is classified as short-term or long-term. For tax purposes, the holding period begins the day after the asset is purchased and ends on the day it is sold.

Characteristics of Short-Term Capital Gains

Holding Period
- Defined as one year or less.
- If an asset is sold exactly one year after purchase, it is considered a short-term capital gain.
Taxation
- Taxed at the individual’s ordinary income tax rate, which depends on their tax bracket.
- Ordinary income tax rates range from 10% to 37% in the U.S. (as of 2025).
Applicable Assets
- Commonly includes stocks, bonds, mutual funds, real estate, and other investments sold within one year of purchase.

Calculation of Short-Term Capital Gains

Formula:
Short-Term Capital Gain=Selling Price−(Purchase Price+Transaction Costs)\text{Short-Term Capital Gain} = \text{Selling Price} - (\text{Purchase Price} + \text{Transaction Costs})

Selling Price: The amount received from selling the asset.
Purchase Price: The amount paid to acquire the asset.
Transaction Costs: Fees associated with buying and selling the asset, such as broker fees or commissions.

Example:
You purchase 100 shares of a stock at $50 each and sell them six months later for $60 each. The transaction costs are $100.

Purchase Price: $5,000 (100 shares × $50/share).
Selling Price: $6,000 (100 shares × $60/share).
Short-Term Capital Gain: $6,000 - $5,000 - $100 = $900.

This $900 is taxed as part of your ordinary income.

Tax Implications

Higher Tax Rate
- Short-term gains are taxed at ordinary income rates, which are typically higher than long-term capital gains tax rates (0%, 15%, or 20%, depending on income).
Impact on Tax Bracket
- The gain could push you into a higher tax bracket, increasing the rate at which other income is taxed.
Offsetting Gains with Losses
- Short-term capital gains can be offset by short-term capital losses, reducing the taxable amount.
- If total losses exceed total gains, up to $3,000 of net losses can be deducted from other income annually, with the remainder carried forward to future years.

Strategies to Minimize Short-Term Capital Gains Tax

Hold Investments Longer
- If feasible, hold assets for more than one year to qualify for lower long-term capital gains tax rates.
Tax-Loss Harvesting
- Sell underperforming assets to realize losses that can offset short-term gains.
Use Tax-Advantaged Accounts
- Invest through tax-advantaged accounts such as 401(k)s, IRAs, or HSAs, where gains may grow tax-deferred or tax-free.
Timing Sales
- Plan asset sales strategically to avoid short-term classification or reduce taxable income in a high-income year.

Example in Real Life

Imagine you purchase shares of a tech company for $10,000 and sell them eight months later for $12,000, resulting in a $2,000 short-term capital gain. If your ordinary income tax rate is 24%, you would owe $480 in taxes on this gain ($2,000 × 0.24).