Short-Term Capital Gains

How It Works

Short-term capital gains receive no preferential tax treatment, they're added to your ordinary income and taxed at your marginal rate, which can be as high as 37% for federal tax plus applicable state taxes. This makes short-term trading significantly more expensive from a tax perspective than long-term investing. A trader in the 35% federal bracket plus California's 13.3% state tax pays up to 48.3% on short-term gains, compared to a maximum of 33.3% on long-term gains (20% federal + 13.3% state). The wash sale rule adds complexity to short-term trading: if you sell a security at a loss and repurchase the same or a "substantially identical" security within 30 days before or after the sale, the loss is disallowed for tax purposes. This prevents taxpayers from selling and immediately rebuying just to generate a tax loss. Day traders and frequent traders often elect "trader tax status" (Section 475 mark-to-market) which allows all gains and losses to be treated as ordinary income with no wash sale restrictions and no $3,000 loss limitation. Understanding the short-term vs. long-term distinction is essential for investment timing. If you have a profitable position approaching the one-year mark, it often makes sense to wait before selling, even if the price declines somewhat, because the tax savings from the lower long-term rate can outweigh a modest price drop.

Short-Term Capital Gains is one of the tax-code concepts that recurs across TaxCompare. The definition above is the technical answer; below is the practical context for how it shows up in the state-vs-state comparisons that drive the site.

In the tax-comparison engine, this concept feeds either the federal calculation (IRS Revenue Procedures) or the state calculation (Tax Foundation state-tax database). The methodology page describes which inputs flow into each piece of the model.