What is the short-term capital gains tax?

Maybe you aspire to be an active investor, buying and selling investments every day. Or maybe you recently bought an investment you think has peaked in value and you want to sell it before its value drops. In these cases and many others, it's important to know about the short-term capital gains tax.

What are short-term capital gains?

Short-term capital gains are earnings from selling for profit an investment you've owned for a year or less. If you sell the asset for less than you bought it for within a year, it's called a short-term capital loss. And if you sell the asset after more than a year of holding it, those capital losses or gains are considered long-term.

What is the short-term capital gains tax?

The short-term capital gains tax is what you may have to pay the IRS on profits you've made from selling an investment you've held a year or less. This tax is likely to be a higher rate than the tax charged for selling investments you've held for more than a year. The federal short-term capital gains tax rates range from 10% to 37%, and the rate which applies to you depends on your tax-filing status and your income. It's the same as your current federal income tax rate.

Short-term capital gains tax rates 2025

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Short-term capital gains tax rates 2026

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How does the short-term capital gains tax work?

The tax you pay on short-term capital gains is determined by several factors:

• Your income. Your short-term capital gains tax rate is generally the same as your ordinary tax rate, ranging from 0% to 37%. High-income earners may also be subject to an additional 3.8% tax called the net investment income tax (NIIT).
• The original purchase price of your investment, including adjustments (e.g., broker's fees, commissions, etc.). This is your “cost basis.”
• How long you've owned the investment. If a year or less, you’ll owe short-term capital gains taxes.

Federal capital gains tax doesn't apply to tax-advantaged accounts, such as 401(k)s and other employer-sponsored retirement plans; individual retirement accounts (IRAs); 529s; or health savings accounts (HSAs). You may still owe ordinary income taxes on withdrawals from tax-deferred accounts or if requirements for tax-free withdrawals aren't met.

However, capital gains tax could apply to shares you own in a mutual fund or exchange-traded fund (ETF) if the fund has sold securities for a profit, even if you didn't sell any shares.

Short-term capital gains tax vs. long-term capital gains tax

The key difference between when investment gains are short-term or long-term is how long you’ve owned the investment. Investments held a year or less are considered short-term, with capital gains tax rates ranging from 10% to 37%; those held longer than a year are considered long-term, with tax rates at 0%, 15%, and 20%, depending on your income and tax-filing status.

Long-term capital gains tax rates 2025

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Long-term capital gains tax rates 2026

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Exceptions to short-term capital gains taxes

Generally, when you sell for profit a principal residence you've owned for a year or less, you will pay short-term capital gains tax. But there are certain situations that may allow you to exclude up to $250,000 of gains for single filers or $500,000 for married filing jointly partners, as long as some additional conditions are met. This includes requirements that state you must have owned and used the home as your main home for at least 2 of the preceding 5 years. Other situations include but are not limited to the following (additional requirements may apply):

• Losing your spouse, whether by separation, divorce, or death
• Selling vacant land along with the home
• The destruction of your home
• Using a portion of the property for business or rental use
• Serving in the military during the ownership

Plus, you might be able to increase your cost basis—or what you originally paid for the residence, plus fees and closing costs—by adding the cost of capital improvements you've made. These are updates beyond repairs and maintenance that add value or extend a home's life, such as additions and modernizations. Consult a tax professional for your situation.

How to help reduce short-term capital gains taxes

With careful planning, you may be able to help reduce your short-term capital gains taxes.

Tax-loss harvest

Tax-loss harvesting allows you to sell investments that are below your cost basis/purchase price and use those capital losses to offset realized capital gains from selling appreciated investments. Net losses can be used to offset ordinary income, generally up to $3,000. Whatever losses go unused can be carried forward to future years.

For example, assume you have a short-term capital loss of $12,000 but a short-term capital gain of $5,000. You offset that gain with some of the loss, leaving you with $7,000 in losses. You could use $3,000 to reduce ordinary income that tax year and carry forward the remaining $4,000 loss to offset capital gains and/or income in future tax years.

If you use a tax-loss harvesting strategy, avoid buying other investments that are "substantially identical" in the 30 days before or after you sell an investment at a loss. That's because that could be considered a "wash sale," and your loss is added to the cost basis of the new investment. The holding period of the investment you sold is also added to the holding period of the new investment. Tax-loss harvesting can be complicated to implement, so consider discussing with a financial professional.

Note that if you invest in mutual funds and investments are sold within the fund that cause you to incur short-term capital gains via distribution, you won't be able to offset these with losses and you'll have to pay any applicable taxes. You can still tax-loss harvest to offset any long-term capital gains distributions that funds may incur and pass on to you, though.

Related: Tax-Loss Harvesting ToolLog In Required (login required)

Use tax-deferred accounts

Federal capital gains taxes are deferred on investments held in tax-advantaged accounts, like retirement accounts. Capital gains taxes are not deferred in a taxable brokerage account. In other words, you typically would not pay capital gains tax on investments that are sold while the assets are still held within the account.

Hold on to investments longer

Because capital gains tax rates are generally more favorable on long-term gains, consider holding on to investments for over a year.

Sell when your income is lower

Short-term capital gains taxes are tied to your ordinary income tax rate, so when your income puts you in a lower tax bracket, the tax rate on investments you sell for a profit will be lower too.

State short-term capital gains taxes

In addition to federal capital gains tax, you may have to pay capital gains state tax, depending on where you live. Generally, most states and the District of Columbia tax gains as ordinary income, but here are a few notable exceptions:

• 8 states don't tax capital gains or income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
• Washington does not tax most income, including short-term capital gains, but does tax certain long-term capital gains.
• Missouri became the first state to exempt capital gains from income tax, effective January 1, 2025.
• Massachusetts taxes short-term capital gains more than ordinary income, with an additional tax for extremely high earners.