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Sunday, June 23, 2024

What are short-term capital gains taxes?

What are short-term capital gains taxes?

04.18.2024

Capital gains 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 below. 

Understanding short-term capital gains 

Short-term capital gains are those 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 January 15, 2024.  

  • You sell the stock for a profit on November 15, 2024. 

  • 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 January 15, 2024, and don't sell it until February 1, 2025, 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 make when you sell an asset you've owned for a year or less. 

Short-term capital gain calculation 

If you've sold assets 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 can bump them into higher tax brackets, which can lead to an unpleasant surprise come tax time. Consider using our capital gains tax calculator to estimate how much you'll owe so you can understand how short-term gains might impact your tax refund or balance due. 

If you'd prefer to do the job manually, 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 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 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 tables below to understand the federal short-term capital gains tax rate you might pay for the2024 tax year. 

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

Federal short-term capital gains tax rates for 2024 

Short-term capital gains are included with your other ordinary income to help determine how much you pay in taxes overall. The 2024 tax brackets are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. 

Here is the federal tax bracket breakdown for 2024: 

Tax rate 

Single 

Head of household 

Married filing jointly 

Married filing separately 

10% 

$0 to $11,600 

$0 to $16,550 

$0 to $23,200 

$0 to $11,600 

12% 

$11,601 to $47,150 

$16,551 to $63,100 

$23,201 to $94,300 

$11,601 to $47,150 

22% 

$47,151 to $100,525 

$63,101 to $100,500 

$94,301 to $201,050 

$47,151 to $100,525 

24% 

$100,526 to $191,950 

$100,501 to $191,950 

$201,051 to $383,900 

$100,526 to $191,950 

32% 

$191,951 to $243,725 

$191,951 to $243,700 

$383,901 to $487,450 

$191,951 to $243,725 

35% 

$243,726 to $609,350 

$243,701 to $609,350 

$487,451 to $731,200 

$243,726 to $365,600 

37% 

$609,351 or more 

$609,351 or more 

$731,201 or more 

$365,601 or more 

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. 

When you're looking to invest for retirement, consider tax-deferred accounts such as Traditional 401k plans or IRAs. The money in these accounts is invested, and you may buy and sell assets to help increase your account value. 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 in mixtures 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 capital loss harvesting and is subject to netting rules depending on the holding period and classification of the gains. 

Our take 

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 plan ahead for taxes, so you're not surprised by what you owe come April. 

Solid planning: 

  • Helps your money work hard for you and your wealth grow 

  • Gives you a clear look at your finances so you can make wise choices 

  • Lets you proactively manage expenses such as tax burdens to reduce their cost and the impact they can have on your life 

Get the scoop on your money.

Stay current on planning, saving, and investing for life.

RO3510488-0424  

The Currency editors

Staff contributors

The CurrencyTM, a publication from Empower, covers the latest financial news and views shaping how we live, work, and play. We keep you current on ways to plan, save, and invest for life.

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