Key takeaways

• Short-term capital gains come from selling assets held for one year or less
• These gains are typically taxed as ordinary income, not at lower capital gains rates
• Short-term gains can push total taxable income into a higher tax bracket

Capital gains – the profits received on an investment – are considered income, which means they are taxed by the IRS. But the IRS doesn't treat all income the same, and some earnings are taxed at higher rates than others.

Find out more about what short-term capital gains are and how they're treated differently from long-term capital gains.

Understanding short-term capital gains

Short-term capital gains are the gains that are realized within a single year. This means you owned an asset for a year or less before selling it for a profit. Here's an example:

• You purchase stock on Jan. 15, 2025. 
• You sell the stock for a profit on Nov. 15, 2025.
• You owned the stock for less than a year. This profit would be counted as a short-term gain.

This contrasts with long-term capital gains. Long-term capital gains are those related to assets you have owned for more than a year. For example, if you buy stock on Jan. 15, 2025, and don't sell it until Jan. 16, 2026, or later, you owned it for more than a year. Any profit gained during the transaction would likely be considered long-term capital gains. 

What are short-term capital gains?

Capital gains refer specifically to profits you make when selling an asset. In this context, assets can include stocks, bonds, real estate and other property you might own, though there are exceptions. Short-term capital gains are profits you may realize when you sell an asset you've owned for a year or less.

Short-term capital gain calculation

After you've sold assets at a profit that you have owned for a year or less, you will owe income tax against the amount of gain.

Many people don't realize that this type of income may increase overall taxable income and potentially affect their marginal tax rate.

Read more: Federal income tax: Rules & ways to reduce your tax burden

The formula for short-term capital gains tax is:

(Disposition basis - Acquisition basis) x Tax rate

Acquisition basis

Acquisition basis refers to how much you paid for an asset, including sales tax. If the asset in question is a stock or bond, the acquisition basis also includes costs such as transfer fees and commissions. 

Disposition basis

The disposition basis is how much you received, in total, when selling the asset. This is not necessarily how much the buyer pays. For example, if you sell an asset for $1,000 but the transaction includes $50 in fees, you may only walk away with $950. That means your disposition basis would be $950.

An example of the capital gains formula

Let's look at a simple hypothetical example to understand acquisition basis and disposition basis and how they work with the capital gains formula.

• You buy 100 shares of stock at $5 each. You also pay fees of $15. Your total purchase cost, on an acquisition basis, is $515.
• Later that year, you sell all 100 shares of stock for $8 each. You pay a fee of $25. Your disposition basis is $800 minus the $25 in fees, or $775.
• Your short-term capital gain is $775 minus $515, or $260.

What is the federal short-term capital gains tax rate?

Here's where it gets a bit complicated. There's not one single federal short-term capital gains tax rate you can apply to your earnings. The rate of tax you pay depends on:

• How much you earned in the taxable period
• The year in which you realized the earnings
• Your tax filing status

This is because, generally, short-term capital gains are taxed as ordinary income, so it's based on your marginal income tax bracket. Check out the current tax brackets for tax years 2025 and 2026 to understand the federal short-term capital gains tax rate you might pay next.

Also, some states may apply a capital gains tax as well, which you will pay when you file your state tax return, if applicable.

How to avoid short-term capital gains tax

A good way to avoid short-term capital gains tax is to stretch your ownership out to more than a year. If you can hold an asset for longer than a year, the taxable gain when you sell it aren't taxed as short-term capital gains but are instead subject to the more preferential long-term capital gain rates.

Read more: Ways to avoid or minimize capital gains tax

When you're looking to invest for retirement, consider tax-deferred accounts such as traditional 401(k) plans or IRAs. The money in these accounts are treated as investments, and savers are able to buy and sell assets to help the potential growth of their accounts. However, the sales within these accounts are not taxed, as they reside in a tax-preferred retirement account. Generally, the withdrawal is taxed when a distribution or conversion takes place. 

You can also sell assets at a loss to offset capital gains exposure. For example, if you have one asset that would turn a profit of $2,000 and another one that would generate a loss of $1,000, you might sell them in the same year. Your total profit in this case would only be $1,000, helping to reduce how much you would owe in capital gains taxes. This is referred to as tax-loss harvesting and is subject to netting rules, depending on the holding period and classification of the gains.

Tracking gains

Taxes, in general, can be complex. When you throw investments into the mix, you will want to consider how short-term capital gains might impact your tax bill. Planning helps you consider all the details related to your money and how to assess options for taxes, so you're not surprised by what you owe come April.