What Is a Short-Term Gain and How Is It Taxed?
Explore the tax implications tied to how long you own an asset. Profits from assets sold within a year are treated differently than long-term investments.
A short-term gain is the profit earned from selling a capital asset owned for one year or less. This type of gain is a form of income subject to taxation by the Internal Revenue Service (IRS). The length of time an asset is held directly influences how the profit is taxed, making the distinction between short-term and long-term gains an important part of managing investment returns.
The Holding Period and Capital Assets
The classification of a gain as short-term depends on the holding period, which is the amount of time you own an asset before selling it. For a gain to be considered short-term, this period must be one year or less. The IRS states the holding period begins the day after you acquire the asset and ends on the date you sell it.
This timeframe applies to the sale of capital assets, which includes most property owned for personal use or investment. Common examples are stocks, bonds, mutual funds, cryptocurrencies, and jewelry. Conversely, items not considered capital assets include inventory or property held for sale to customers as part of a business’s operations.
If you receive an asset like stock as a gift, your holding period generally includes the time the original owner held it. Property acquired through inheritance is automatically treated as being held for more than one year, so any gain from its sale is considered long-term, regardless of how long you actually owned it.
Calculating Your Short-Term Gain or Loss
To determine your gain or loss, subtract the asset’s cost basis from its sale proceeds. A positive result is a gain, while a negative result is a loss. The sale proceeds are the total amount you receive from the sale, less any commissions or expenses.
The cost basis represents your total investment in the asset. It begins with the original purchase price but also includes associated costs from the transaction, such as brokerage commissions or transfer fees. Keeping detailed records of these costs is important for an accurate calculation.
To illustrate, imagine you purchase 50 shares of a company’s stock for $50 per share, totaling $2,500. You also pay a $15 commission, bringing your total cost basis to $2,515. Eight months later, you sell all 50 shares for $65 per share, for a total of $3,250, and pay another $15 commission. Your sale proceeds are $3,235 ($3,250 – $15), resulting in a short-term capital gain of $720 ($3,235 – $2,515).
Taxation of Short-Term Gains
Short-term capital gains are taxed at your ordinary income tax rates. These are the same progressive tax rates that apply to your wages and salary, which for 2025 fall into brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. This treatment differs from long-term capital gains, which benefit from lower, preferential tax rates.
Before tax is applied, taxpayers must go through a netting process on IRS Schedule D, Capital Gains and Losses. All of your short-term capital gains for the year are combined with your short-term capital losses. If you have more gains than losses, the result is a net short-term capital gain, which is then added to your other income and taxed.
If you have a net short-term capital loss, you can use it to offset long-term capital gains. If losses still remain, you can deduct up to $3,000 of those losses against your ordinary income for the year. Any loss amount exceeding the $3,000 limit can be carried forward to future tax years to offset future gains or income.