What Are Short-Term Capital Gains? Tax Rules, Rates and How They Are Calculated (2024)

Any piece of property you own for personal use or investment is a capital asset. When you sell these items at a profit, you are subject tocapital gains taxes. Read on to learn more about these taxes and how they are calculated.

Short-Term Capital Gains: Key Takeaways

Here are some key points to know about short-term capital gains:

• A short-term capital gain is when you sell a capital asset after owning it for less than a year.
• You calculate ownership time starting the day after you took ownership of the capital asset to the day you sold it.
• Short-term capital gains are taxed as ordinary income, which is taxed at a specific rate based on yourtax bracket.

How To Calculate Short-Term Capital Gains

To calculate your short-term capital gains, you need to know what you paid for the capital asset (the acquisition basis) and the sale amount (the disposition basis).Once you know those, you can use this formula:

• (disposition basis – acquisition basis) x tax rate

For example, if you purchase shares of stock on Jan. 20, 2024, for $25,000 and then sell them in Aug. 2024 for $75,000, you would have a capital gain of $50,000. If you are in the 32% tax bracket, you’d pay a capital gains tax of $16,000.

Calculating your short-term capital gain tax amount is important because if you have a capital gain of over $1,000, you need to fileestimated taxes to avoid paying a penalty when you file your taxes. You pay estimated taxes quarterly.

If you have a capital loss, you can use the money you lost as a tax deduction on your income up to $3,000 — or $1,500 if you are filing separately. If your loss exceeds the annual limit, you can save it and roll it over to the following year.

For example, if your capital loss is $5,000, you would deduct $3,000 of that loss on your taxes in 2024, and roll the remaining $2,000 to use as atax write-off on your 2025 taxes.

Remember: If you sell multiple capital assets in a tax year, you’d need to add up all your capital gains and capital losses to determine whether you have net gain or loss.

Short-Term Capital Gains Tax Rates

Your annual income bracket determines your short-term capital gains tax rate. To find your tax bracket, total all the income you’ve made for the year, including all capital gains.

For tax years 2023 and 2024, the government taxes short-term capital gains using the income brackets listed below:

Short-Term vs. Long-Term Capital Gains

A short-term capital gain is for assets that you hold for less than a year. A long-term capital gain occurs when you sell a capital asset after owning it for over a year. Long-term capital gains are taxed based on the amount of the gain. The rates are more favorable and encourage people to hold on to their investments longer.

Long-Term Capital Gains Tax Rates

The 2023 and 2024 long-term capital gains tax rates are the same.

Exceptions To Capital Gains

You should be aware of a few exceptions to capital gains taxes so you don’t pay a tax unnecessarily.

Capital Gains From Tax-Advantaged Accounts

Tax-advantaged accounts are investments, savings plans and financial accounts that are not traditionally taxed.

These include tax-exempt accounts such asRoth IRAs and529 college savings plans. In these accounts, you make contributions after paying taxes, and gains are not taxed as long as you abide by any restrictions on the account.

You’ll pay a capital gains tax on sales of investments in your tax-deferred account, such as a 401(k) and IRA, after age 59 ½. This is often a better option since most people are in a lower tax bracket after age 59 ½.

Capital Gains From Home Sales

Capital gains from your home sale are exempt from capital gains tax up to $250,000 filing single and $500,000 filing separate. To qualify, you need to prove ownership and use for an aggregated period of at least two of the five years before the sale.

How Do You Avoid Short-Term Capital Gain Taxes?

There are a few ways to minimize or avoid short-term capital gains taxes.

• The easiest and most common is to hold onto your capital asset for more than a year so you pay long-term capital gains taxes, which are less than short-term capital gains taxes.
• Another strategy involves ensuring you make the smallest gain possible. To do this, include any fees, taxes or commissions you paid when you purchased the capital asset as part of your acquisition basis.
• Whenever possible, make investments within tax-advantaged accounts. Doing so will either eliminate capital gains taxes in the case of tax-free accounts or lower your short-term capital gains tax rate in the case of tax-deferred accounts.
• Consider donating your short-term capital assets rather than selling them. You can write off the donation’s fair market value as acharitable deduction, and the nonprofit will not need to pay taxes on the donated asset as a tax-exempt entity.

Final Take

When you buy or sell a capital asset, make certain to document the price and date of sale for tax purposes. Whenever possible, avoid short-term capital gains to save money on taxes.

Information is accurate as of March 19, 2024.