Short-Term Capital Gains
Profits from selling assets held for one year or less, taxed as ordinary income at your regular marginal tax rate.
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.
Related Terms
Capital Gains Tax
Tax on the profit from selling an asset such as stocks, bonds, or real estate, with rates depending on how long you held the asset.
Long-Term Capital Gains
Profits from selling assets held for more than one year, taxed at preferential rates of 0%, 15%, or 20% at the federal level.
Marginal Tax Rate
The tax rate applied to the last dollar of your taxable income, determined by which federal tax bracket that dollar falls into.