Short-Term Capital Gains Tax: A Quick Guide
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A Quick Guide To The Short-Term Capital Gains Tax
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Capital gains taxes apply in different ways to different types of profits and investments, and so they’re often misunderstood and can cause a certain degree of frustration. This guide aims to explain them in a clear, concise manner that will help anyone understand them better and save yourself a bad time when calculating how much you owe on capital gains. But first, we have to take a step back and ask: What is a capital gain?
Further down in this guide we will define all these terms in a more technical manner, but for now, let’s think of capital gains as what happens when you sell a capital asset for more than what you initially paid for it. And what is a capital asset? Well, pretty much anything you own is a capital asset; this includes everything from your home all the way down to personal-use items such as furniture and even art pieces. Other, more abstract forms of capital assets include any stock and bonds that you hold as investments.
When you sell a capital asset (which, as stated in the previous section, includes most everything you own), the difference between the adjusted basis (the current recorded value of the asset) and what you made from it is calculated as either a capital gain or a loss; as an aside, capital losses are not tax-deductible, and while you can use losses to offset your gains to have an advantage while filing taxes, remember that a short-term gain can only be reduced by a short-term loss.
Also in this guide, you will notice that we use the term “adjusted basis”; an asset’s basis is what it costs the owner (that’s you) to acquire, while the adjusted basis is the change to the recorded initial cost of that asset. With that groundwork laid out, let’s dive into capital gains and the tax rates that apply to them.
Understanding The Short-Term Capital Gains Tax
While it is true that capital gains can come from the sale of almost anything you own, most people immediately associate them with stocks and funds because their high level of price volatility can make them highly attractive as assets. For example, if you bought shares of a stock valued at $1,000 then sold them for $1,500 within the same year, the $500 difference would be your capital gain, and would be taxed as regular income using your income tax bracket.
In a nutshell, short-term capital gains are defined as profits realized from selling either personal property or investments that you have held for less than a year. The short-term capital gains tax, then, is simply the rate at which these profits are taxed, which correspond directly with your personal income tax rate.
At the end of the year, after calculating both your gains and losses, the total gains are added to your income for the year for tax purposes. Be careful, since this means that your short-term capital gains could push your income into a higher tax bracket, making you pay more taxes overall for that year. This is why it’s recommended that you hold onto any investments for longer than a year, but more on that further down in this guide.
Types Of Capital Gains
Depending on how long you held onto an asset before selling it, capital gains are classified into short-term and long-term.
- Short-term capital gains: According to the IRS, if you held onto the asset for less than a year, then short-term capital gains will apply to them. These assets are subject to ordinary income tax rates, meaning that they will be taxed based on your income bracket (10%, 12%, 22%, etc.).
- Long-term capital gains: If you held onto the asset for longer than a year, long-term capital gains will apply to it. The tax rates for long-term capital gains are lower than short-term ones (at 0%, 15%, or 20%), depending on your taxable income.
As you can see, your capital gains will be taxed at a higher rate if you are in a higher tax-bracket and hold on to the asset for less than a year. In short, short-term capital gains are taxed at ordinary income rates, so holding your investments for more than a year before selling them will lead to more significant tax savings.
Capital Gains Tax Rates For 2025
As you will see in the following table, the 2025 capital gains tax rates also conform to the trend that capital gains are taxed at lower rates than your individual income, which provides many opportunities to reduce the amount that you have to pay at the end of the tax year in capital gains taxes.
2025 Tax Rates For Long-Term Capital Gains
| Filing Status | 0% Rate Amount | 15% Rate Amount | 20% Rate Amount |
| Single | $0 to $48,350 | $48,351 to $533,400 | $533,401 and above |
| Head of household | $0 to $64,750 | $64,751 to $566,700 | $566,701 and above |
| Married filing jointly and surviving spouse | $0 to $96,700 | $96,701 to $600,050 | $600,051 and above |
| Married filing separately | $0 to $48,350 | $48,351 to $300,000 | $300,001 and above |
Source: Internal Revenue Service. “Rev. Proc. 2024-40.”
2025 Tax Rates For Short-Term Capital Gains
As we have explained at the beginning of this article, short-term capital gains are taxed based on your ordinary income tax bracket. The following tax rates correspond to the 2025 period: 10%, 12%, 22%, 24%, 32%, 35% or 37%.
Reporting Capital Gains To The IRS
Form 8949 (Sales and Other Dispositions of Capital Assets) is the one you need to report all capital gains to the IRS that result from investments. This form is divided into short-term gains and long-term gains, and it helps you calculate and report short-term gains according to your tax bracket. The information you put into Form 8949 can be carried over to Schedule D, which is used to report capital gains resulting from the sale of capital assets.
Just to be clear, Form 8949 and Schedule D are both different forms and you need both, since the former is the detailed information on the numbers that you will enter on the latter. Make sure to fill out Form 8949 correctly to avoid any hassles down the line.
Understanding Basis
Basis is another term we used at the beginning of this guide, but what is it exactly? Here’s the rundown. Basis is usually what you paid for a capital asset, and the difference between that amount and the amount for which you sell the asset is either a capital gain or a loss.
Your adjusted basis is the cost of the asset after adjusting for various factors; it is increased by adding tax items such as the cost of improvements, and reduced by market depreciation, non-dividend distributions on stock, and more.
How To Avoid Or Minimize Capital Gains Taxes
There are several ways in which you can significantly reduce the tax rates on your capital gains that are completely legal. Be advised, however, that while all of the following methods are considered to be legal by the federal government, they all require you to adhere to many rules and regulations so as not to run into any legal trouble.
1. Hold Your Assets For Longer Than A Year
This is the simplest way in which you can minimize your capital gains tax obligations. All you have to do is hold any taxable assets for a period of at least one year to qualify for the long-term capital gains tax rate, which is significantly lower than the short-term one.
Marginal tax brackets aren’t static but, as we mentioned in the previous section, the trend is for the maximum income tax rate to be higher than the maximum rate on long-term capital gains if you take your income bracket into consideration.
2. Use Tax-Advantaged Accounts
Tax-advantaged accounts such as 401(k) plans and individual retirement accounts allow investments to grow either tax-free or tax-deferred, which means you don’t pay income or capital gains taxes on the assets of your account, only when you withdraw money from that account. Roth IRAs and 529 accounts can take it one step further by following certain rules, allowing you to withdraw money tax-free from those accounts (unlike regular IRAs and 401(k)s, which do make you pay ordinary income taxes on all early withdrawals.)
3. Use Tax-Loss Harvesting To Your Advantage
While tax-loss harvesting is a complex topic that deserves an article all its own, the short and long of it is that, when reviewing your portfolio, you realign your investments and lower the amount of your taxable gains if you use your total capital losses to offset your long or short-term capital gains.
For example, let’s say you sell shares of a stock for a gain of $15,000, but also have a capital loss of $10,000 from the sale of another unrelated asset; in this case, you would use those capital losses to offset the gains you made, reducing your tax liability in the end. This also works the other way around if your losses are larger than your gains, meaning that you can use those losses to offset the totality of your capital gains and up to $3,000 of your ordinary taxable income if you file as a single taxpayer, and carry any amount over that to future tax years.
It has to be said, however, that tax-loss harvesting as a strategy is not for everyone. It’s a manual process with many moving parts, so inexperienced investors are advised to steer clear of it until they have a greater understanding of how portfolios are taxed.
4. Take Home-Sale Tax Exemptions
There are some notable exceptions to capital gains taxes that you can take advantage of if you follow proper procedure, particularly the sale of your home. In fact, federal tax law allows you to exclude up to $250,000 of capital gains from the sale of your home from your income, or up to $500,000 if you file jointly with your spouse.
There are some special rules in order to qualify for the Section 121 exclusion:
- It has to be your primary residence (does not apply to rental properties).
- You must have lived in the property for at least two full years of the past five; these two years do not have to be consecutive.
- You can only qualify for this exclusion once every two years.
It goes without saying how advantageous this tax exemption can be, so make sure to keep thorough records of your basis as soon as you acquire a property, since these records can make all the difference down the line when reporting the sale of a property and trying to qualify for the exemption with the IRS.
5. Donate To Charity
Something of a tried and true tactic, charitable giving is actually a win-win scenario for both you and the charity you choose to make a donation to. This is because any investment you have that has appreciated in value, such as a stock that you have held long-term, can be donated directly to the charity instead of cash; then you won’t owe capital gains taxes on the profit of those stocks and neither will the charity. On top of that, you will get a tax deduction based on the adjusted basis of the stock instead of the actual amount you paid for it.
How To Calculate Your Capital Gains
You will make things much easier on you at the end of the tax year if you only incur capital gains taxes on long-term capital gains (or if you’re in the unfavorable position of only having short-term capital gains for that year), since all you need to do is deduct your capital losses from your gains, resulting in your taxable gains for the year.
If, however, you have both long-term and short-term capital gains (and some losses) to report, you have to tabulate them separately. Add up all your short-term capital gains, then subtract the total short-term losses for the same period. Then, do the same for the long-term gains and losses.
After you have tallied both of your totals, you have to know at what rate they will be taxed, which for short-term gains depends on your marginal income tax rate.
Short-Term Capital Gains Taxes FAQ
1. What are short term capital gains?
Short-term capital gains are simply the profits that you have acquired from selling assets you’ve held for one year or less.
2. What is the short-term capital gains tax?
Unlike long-term capital gains, which have their own tax rates (with a maximum of 20% for both 2024 and 2025), short-term gains are taxed at the same rate as your regular income, based on your income tax bracket. Also, short-term gains can even push your income into a higher bracket and cost you more in taxes overall for that year.
3. What is the difference between short-term capital gains and long-term capital gains?
In a nutshell, short-term gains come from assets that you’ve held for a year or less, taxed at ordinary income rates; long-term gains come from assets you’ve held for more than a year, taxed at a lower rate.
4. Can you reduce taxes on short-term capital gains?
No, you cannot reduce the taxes on individual short-term capital gains per se. However, you can consider holding your capital assets for longer than a year to qualify for long-term capital gains instead, or offset short-term gains with your short-term losses to reduce your total taxable amount.
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