Understanding short-term capital gains tax

Summary 

What is short-term capital gains tax? 

Capital gains tax applies when selling an asset or investment at a profit.  

Sale profits are taxable, but they may differ depending on whether the gains were accrued in the short or long term.  

The short-term capital gains tax is a tax on profits from investments of one year or less. The gains are taxed as ordinary income and are set based on the investor’s federal income tax bracket.  

Understanding short-term capital gains tax is crucial for investors because it informs them about the amount of taxation they can expect on their investments.  

Are short-term and long-term capital gains taxed differently?  

Yes, capital gains are taxed differently based on how long the investor has held onto their corresponding gains.  

Short-term capital gains tax can start anywhere from 10 to 37% and higher, while tax on long-term capital gains can be as low as 0 to 15%.  

What qualifies as a short-term capital gain? 

Profits realized from an investment or property held for 12 months or less must qualify as a short-term capital gain.  

Real estate, treasuries, certificates of deposit (CDs), and stocks are some of the assets typically subject to short-term capital gains tax. Any capital gains made on these investments within the first year of their holding will be subject to short-term capital gains tax.  

Short-term vs. long-term capital gains tax rates 

The tax rates for short-term and long-term capital gains vary depending on factors such as income level, marital status, and holding periods.  

Short-term capital gains tax rates are very similar to income tax. They are taxed at the taxpayer in question’s marginal tax rate and the investor's federal income tax bracket.  

Tax rates for short-term capital gains typically start at 10% and work their way up to 37%.  

Long-term capital gains tax rates are much lower, ranging between 0% and 15%, depending on your income level.  

How are short-term capital gains taxed? 

Short-term capital gains are taxed based on the individual taxpayer’s income level. The higher the income level, the higher the capital gains trust they will have to pay.  

Another factor that comes into play when taxing short-term capital gains is marital status. If your filing status is single or married but filing separately, your tax rate is likely to be lower.  

However, if you are the head of a household or married and filing jointly, your short-term capital gains tax rate is likely to be higher.  

The tables below show the 2023 short-term capital gains tax brackets in comparison to those in 2024. 

Short-Term Capital Gains Tax Rates for 2023:

Short-Term Capital Gains Tax Rates 2024:

Is short-term capital gains tax the same across the US? 

Short-term capital gains are treated at the state level with variations across states.  

For example, capital gains rates in California are some of the highest not just in the US but in the world, as they can include 23.8% plus 13.3% taxation rates. 

What are some strategies to minimize short-term capital gains tax? 

The most straightforward strategy for minimizing short-term capital gains tax is to simply hold onto your gains for longer than a year, thus turning them into long-term capital gains and reducing the tax rate. However, there are other options, too.  

You can also use tax-advantaged accounts such as retirement (401k) accounts and Roth IRAs to reduce your taxable income and lower your capital gains taxes.  

Another tax minimization strategy is offsetting gains with losses, also known as tax-loss harvesting. This strategy involves selling underperforming assets and booking a loss to offset taxable investment gains.  

How do I report short-term capital gains tax? 

You can report short-term capital gains on tax returns by filing the right IRS forms, Schedule D, Capital Gains and Losses, and then transferring them to line 13 of Form 1040.  

This would be directed to Individual Income Tax Returns.  

In order to keep your investments in order and support the tax filing process, keep detailed records of your investments and stay abreast of governmental updates.  

Common capital gain tax mistakes to avoid 

One of the most common capital gain tax mistakes investors make is selling an asset before reaching the one-year mark. Once those 12 months are over, your capital gains tax rates drop significantly, so waiting is often the best call.  

Another common mistake to be aware of is neglecting to harvest your tax losses. If an asset is underperforming, you can reduce your tax burden by selling investments at a loss and lowering your income status temporarily. This works for long and short-term capital gains taxes.  

Get expert financial advice 

Short-term capital gains tax applies to investments that are sold for profit in 13 months. There are tax advantages to holding on to assets for longer, but there are also limitations that apply. By understanding how you can benefit from the taxation structures, you can maximize your profits and ROI.  

To find out more about short-term capital gains taxes and how to navigate them in a tax-advantaged way, get matched with a financial advisor at Unbiased for expert advice.