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

When you sell an investment you've held for one year or less, the profit counts as short-term capital gain. The IRS taxes this profit the same way it taxes your wages or salary — at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status.

This is different from long-term capital gains, which apply to investments held longer than one year and are taxed at lower rates (0%, 15%, or 20%). The holding period matters because the tax code treats short-term profits as regular income, not investment income.

You report short-term gains on Schedule D (Form 1040) when you file your tax return. If you sold multiple investments during the year, you list each transaction separately, then combine all short-term gains and losses to get your net short-term gain or loss for the year.

Key Takeaways

  • Short-term capital gains are taxed at your ordinary income tax rate, which is higher than the rate for long-term gains.
  • An investment is short-term if you hold it for one year or less; the clock starts the day after you buy it.
  • You can subtract short-term losses from short-term gains to reduce your taxable profit for the year.
  • If your short-term losses exceed your short-term gains, you can deduct up to $3,000 of the net loss against other income, with any remaining loss carried forward to future years.

How the one-year holding period works

The IRS counts the holding period from the day after you purchase an investment until the day you sell it. If you buy a stock on January 15 and sell it on January 15 of the following year, that is exactly one year, and the gain is long-term. If you sell it on January 14 of the following year, it is short-term.

The holding period applies to each investment separately. You might own some stocks long-term and others short-term at the same time. Each one is taxed according to how long you personally held it, not based on when the company went public or when the fund was created.

Your tax rate depends on your total income, not just the investment gain

Short-term capital gains are added to your other income — wages, self-employment income, interest, dividends — and taxed at the same rate as that income. If you earn $50,000 in wages and have a $10,000 short-term gain, your taxable income is $60,000, and the entire amount is taxed at the rate for someone earning $60,000.

This means a short-term gain can push you into a higher tax bracket. If you are near the edge of a bracket, a large gain might cause part of your income to be taxed at 22% instead of 12%, for example. Use a tax calculator or speak with a tax professional to see how a specific gain will affect your bracket.

Your filing status also matters. Single filers, married filing jointly, and heads of household all have different income ranges for each tax bracket. A $10,000 gain affects a single filer differently than a married couple filing jointly.

How to report short-term gains and losses on your tax return

You report each sale on Schedule D (Form 1040), Part I, which is labeled "Short-Term Capital Gains and Losses." For each investment you sold, you enter the date you bought it, the date you sold it, the sale price, your cost basis (what you paid for it), and the gain or loss.

If you sold only one or two investments, Schedule D is straightforward. If you sold many investments, your brokerage will send you a Form 1099-B listing all your sales. You can use that form to fill out Schedule D, though you may need to calculate the cost basis yourself if your brokerage does not provide it.

Once you complete Schedule D, you transfer the net short-term gain or loss to Form 1040. If you have both short-term and long-term gains and losses, you combine them according to IRS rules, which can reduce your overall tax liability.

Using losses to reduce your tax bill

If you sold an investment at a loss, that loss can offset short-term gains. If you have $5,000 in short-term gains and $2,000 in short-term losses, your net short-term gain is $3,000, and you are taxed only on that $3,000.

If your short-term losses exceed your short-term gains, you can deduct up to $3,000 of the net loss against your other income in that year. Any loss beyond $3,000 carries forward to the next tax year, where you can use it to offset future gains or deduct another $3,000 against income. This process continues until you have used up the entire loss.

Some investors deliberately sell losing investments late in the year to offset gains from winning investments. This is called tax-loss harvesting. However, if you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the IRS disallows the loss under the wash-sale rule. Plan ahead if you want to use losses this way.

State and local taxes on short-term gains

In addition to federal tax, most states tax short-term capital gains as ordinary income. The state rate varies widely — from 0% in states like Texas and Florida to over 13% in states like California and New York. Some states have no income tax at all.

A few states, including Maryland and Vermont, tax long-term gains at a different rate than short-term gains, but most do not. Check your state's tax rules or speak with a tax professional if you live in a state with high income tax and expect a large short-term gain.

Some cities also impose local income tax. New York City, for example, taxes investment income the same way the state does. If you live in a city with local tax, factor that into your calculation.

Frequently Asked Questions

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

Short-term gains are taxed at your ordinary income tax rate (10% to 37%). Long-term gains are taxed at lower rates: 0%, 15%, or 20%, depending on your income. Because short-term rates are higher, holding an investment longer than one year usually results in lower taxes on the same profit.

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

Yes. The IRS requires you to report all capital gains, regardless of size. Your brokerage will send you a Form 1099-B, and the IRS receives a copy. Failing to report a gain can result in penalties and interest, even if the amount is small.

Can I choose which investments to sell to minimize taxes?

Yes, if you own multiple shares of the same investment. You can use "specific identification" to tell your brokerage which shares to sell, allowing you to sell higher-cost shares and recognize smaller gains. Discuss this with your brokerage before you sell to make sure they document your choice.

What happens if I have more losses than gains?

You can deduct up to $3,000 of net losses against your other income in that year. Any remaining loss carries forward to future years. This means a bad year of investing can reduce your taxable income and lower your tax bill, even if you do not have gains to offset.

Do I owe taxes on short-term gains if I reinvest the money?

Yes. Reinvesting the proceeds does not change the tax. You owe tax on the gain in the year you sell, regardless of what you do with the money afterward. The tax is based on the profit, not on whether you spend it or invest it again.