What are Short-Term Capital Gains?

A short-term capital gain is the profit on an asset you held for one year or less. Unlike long-term capital gains, which get preferential rates of 0%, 15%, or 20%, short-term gains are taxed as ordinary income at whatever your marginal rate happens to be.

There is no separate short-term capital gains rate. The gain simply stacks on top of your salary and is taxed like another dollar of wages.

How Short-Term Gains Are Taxed

Because the gain is treated as ordinary income, the rate comes from the regular brackets. For a single filer in 2026:

The 3.8% net investment income tax applies on top, charged on the lesser of your net investment income or the amount your modified adjusted gross income (MAGI) exceeds $200,000 single, $250,000 married filing jointly, or $125,000 filing separately, so the effective federal ceiling is 40.8%. State income tax comes on top of that.

What the One-Year Line Costs

The same $30,000 profit produces very different outcomes on either side of the one-year mark:

Slightly more than half the tax disappears for doing nothing but waiting. For active traders this compounds: a strategy that turns the portfolio over several times a year has to clear a materially higher return hurdle than a buy-and-hold approach just to break even after tax.

Netting Gains and Losses

Short-term gains and losses net against each other first, then against the long-term side.

The order runs: short-term losses offset short-term gains, long-term losses offset long-term gains, any remaining loss of one character offsets the other, and up to $3,000 of what survives can offset ordinary income ($1,500 if married filing separately). Anything beyond that carries forward indefinitely.

Because short-term gains are taxed at the highest rates, a short-term loss is the most valuable loss you can have. It shelters income that would otherwise be taxed at up to 37%, which is why tax-loss harvesting is most effective against short-term positions.

The wash sale rule limits this. Buy a substantially identical security within 30 days before or after selling at a loss, and the loss is disallowed for now and added to the basis of the replacement shares. It applies across all your accounts, including an IRA, where the loss is lost permanently rather than deferred.

Common Sources of Short-Term Gains

Some situations generate them regardless of intent. Rebalancing a portfolio that has moved sharply within a year, selling recently vested employee stock, and exiting a position on bad news all produce short-term treatment.

One case that looks like it belongs here but does not: capital gain distributions from a mutual fund. Those are reported in box 2a of Form 1099-DIV and are treated as long-term no matter how briefly you have owned the fund. A fund’s net short-term gains reach you as ordinary dividends instead, taxed at ordinary rates but not as capital gains.

The usual answer is location rather than timing: hold the assets that turn over frequently inside tax-advantaged accounts, where the character of the gain does not matter, and keep long-held positions in taxable accounts where the preferential rate applies. You can see how account location changes your lifetime tax in ProjectionLab’s tax analytics.

Frequently Asked Questions

Is there a separate short-term capital gains tax rate? No. Short-term gains are taxed at your ordinary income rate, the same schedule that applies to wages. The rate you pay depends on your total taxable income for the year, not on the gain in isolation.

Do I pay short-term capital gains tax inside my 401(k) or IRA? No. Trades inside a tax-advantaged account generate no capital gains tax at all, short-term or long-term. Traditional account withdrawals are taxed as ordinary income later; qualified Roth withdrawals are not taxed at all.

How are cryptocurrency gains taxed? The same way. The IRS treats digital assets as property, so a sale within a year of purchase produces a short-term gain taxed as ordinary income. The wash sale rule generally does not reach a digital asset unless that asset is itself stock or a security, such as a tokenized security.

Can I avoid short-term gains by reinvesting the proceeds? No. Reinvesting does not defer the tax. The sale is a taxable event regardless of what you do with the money afterward, with narrow exceptions such as a 1031 exchange for investment real estate.