Short-Term Capital Gain

A short-term capital gain is the profit on the sale of a capital asset held for a short period, which in the United States means one year or less. US tax law treats short-term gains as ordinary income, so they are taxed at the same graduated rates as wages, which are higher than the rates on a long-term capital gain for most taxpayers. Short-term gains are typical of active trading, from frequent stock trades to cryptocurrency swaps.

The term matters most in the United States, where the holding period decides the tax rate. The gain itself is calculated like any other capital gain: net sale proceeds minus adjusted cost basis. Countries such as the United Kingdom do not draw this line and tax gains at the same rate regardless of how long the asset was held.

Imagine buying concert tickets in January and reselling them in March for more than you paid. You made a quick profit on something you held only briefly. Many tax systems see that kind of fast turnaround as closer to running a small trading business than to patient saving.

That is the idea behind a short-term capital gain. In the United States, if you buy an investment and sell it at a profit within a year, the tax office treats the profit much like extra salary and taxes it at your normal income-tax rate, rather than at the lower rate kept for longer holdings.

The holding period starts the day after purchase and includes the day of sale; one year or less is short-term. Net short-term gains are added to the taxpayer's other ordinary income and taxed at the federal brackets, which run from 10% to 37% after the One Big Beautiful Bill Act of July 2025 made the seven-bracket structure permanent. Higher earners may also owe the 3.8% net investment income tax, and most states tax gains as ordinary income too.

The cost of selling early can be large. Consider a taxpayer in the 24% bracket with a $10,000 gain. As a short-term gain it costs $10{,}000 \times 0.24 = 2{,}400$, or $2,400, in federal tax; held a few weeks longer to qualify as long-term at the 15% rate, it would cost $10{,}000 \times 0.15 = 1{,}500$, or $1,500, a saving of $900.

Gains and losses are netted on Schedule D in a set order:

1. Short-term gains are offset first against short-term losses, and long-term gains against long-term losses.
2. If one category ends with a net loss, it is used against net gains in the other category.
3. A remaining net capital loss can reduce ordinary income by up to $3,000 a year ($1,500 if married filing separately), with the rest carried forward.

Because short-term gains face the highest rates, losses that end up offsetting them save the most tax, which is why investors watch the order of netting when harvesting losses. The wash-sale rule, which disallows a loss when substantially identical securities are bought within 30 days before or after the sale, limits how quickly a position can be sold and repurchased for this purpose.

• Active trading. Day trading, swing trading and margin trading generate mostly short-term results, as do strategies driven by signals such as the golden cross or relative strength index (RSI).
• Funds. When a mutual fund realizes short-term gains and distributes them, US investors receive them as ordinary dividends on Form 1099-DIV, not as a long-term capital gains distribution. Funds with high portfolio turnover tend to produce more of them.
• Crypto. Each sale or token-to-token swap of a digital asset held a year or less produces a short-term gain or loss.
• Options and short sales. Gains on many option positions and on closing a short sale are generally short-term, though special rules apply to some contracts. See long and short positions.

A person whose trading is substantial, regular and continuous may qualify as a trader in securities for US tax purposes. A qualifying trader can elect mark-to-market accounting under section 475(f), which treats open positions as sold at year-end and turns gains and losses into ordinary income and loss. This removes the $3,000 loss limit and the wash-sale rule for those positions, but also gives up long-term rates. Most individual investors, even active ones, do not meet the trader test. Certain regulated futures and broad-based index options fall under section 1256, which taxes gains as 60% long-term and 40% short-term regardless of holding period.

In the United Kingdom, gains are taxed at 18% or 24% whether the asset was held for a day or a decade, after the £3,000 annual exempt amount (2026–27). Very frequent trading can, in some cases, be treated as a trade and taxed as income instead. Other countries use a variety of approaches, and an investor's tax residency determines which rules apply. Holding trading activity inside a tax-sheltered account, such as a US IRA or a UK ISA, removes the short-term versus long-term question for gains realized inside the account, though taxes may apply on withdrawal.

• IRS: Topic no. 409, Capital gains and losses
• IRS: Publication 550, Investment income and expenses