taxes

short-term capital gains

Profits from the sale of assets held for one year or less, taxed as ordinary income at the investor's regular income tax rate.

Example

“Selling a stock after 11 months triggered short-term capital gains taxed at her 32% ordinary income rate — not the 15% long-term rate.”

Memory Tip

SHORT-TERM gains (under 1 year) = taxed at your FULL income rate. Hold longer to get the lower rate.

Why It Matters

Understanding short-term capital gains is crucial because they are taxed at your regular income tax rate, which can be significantly higher than the preferential long-term capital gains rates. This means the tax burden on quick investment profits can substantially reduce your actual returns, making it important to consider holding periods when planning investment sales.

Common Misconception

Many investors believe that all capital gains receive the same favorable tax treatment, but short-term gains are actually taxed as ordinary income at rates up to 37 percent, whereas long-term gains may be taxed at only 15 or 20 percent. Holding an investment for just a few extra months can make a meaningful difference in how much you owe in taxes.

In Practice

Suppose you purchase stock for 5,000 dollars and sell it after eight months for 6,500 dollars, resulting in a 1,500 dollar profit. If you are in the 24 percent tax bracket, you would owe 360 dollars in federal taxes on this short-term gain, leaving you with 1,140 dollars in actual profit. If you had waited four more months to qualify for long-term treatment, you might owe only 225 dollars in taxes at the 15 percent rate, keeping 1,275 dollars instead.

Etymology

SHORT-TERM (held less than one year) CAPITAL GAINS. Gains on assets sold SHORT-TERM.

Common Misspellings

short term capital gainsshort-term capital gainshort term captial gains

More in taxes

Other taxes terms you should know

capital gainsThe profit earned from selling an asset for more than its pu…tax bracketA range of incomes taxed at a particular rate under a progre…gross incomeTotal income before any deductions, taxes, or expenses are s…tax deductionAn expense that can be subtracted from taxable income, reduc…capital gainThe profit realized from the sale of a capital asset — such …capital lossThe loss realized from the sale of a capital asset when the …

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