Short-Term Capital Gains Rates
Short-term capital gains — profits from selling assets held for one year or less — are taxed at ordinary income rates, not the preferential 0%/15%/20% rates that apply to long-term gains on assets held more than a year. This is one of the most practically significant distinctions in investment taxation. Under 26 U.S.C. §§ 1221–1222, the short-term/long-term boundary is a binary cliff: 365 days or fewer is short-term; 366 days or more is long-term. The tax impact can be enormous: a high-income taxpayer selling a $100,000 gain after 11 months owes $37,000 in federal tax at the top marginal rate; holding just 31 more days reduces that to $20,000 or less — a $17,000+ difference on the same profit. Short-term losses offset short-term gains dollar-for-dollar, and net short-term losses can offset long-term gains; net capital losses of any kind offset up to $3,000/year of ordinary income, with unlimited carryforward. The 366-day binary creates powerful incentives to manage transaction timing — a core reason why tax-aware investing often diverges from pure return-maximizing investing. For most investors, the single most impactful tax decision in a given year is not which investments to hold, but when to sell them.
Current Law (2026)
Short-term capital gains (assets held one year or less) are taxed as ordinary income at the taxpayer's marginal tax rate.
| Tax Bracket | Effective STCG Rate |
|---|---|
| 10% | 10% |
| 12% | 12% |
| 22% | 22% |
| 24% | 24% |
| 32% | 32% |
| 35% | 35% |
| 37% | 37% |
Plus 3.8% NIIT for taxpayers above $200K/$250K MAGI = 40.8% maximum effective rate.
Legal Authority
- 26 U.S.C. § 1221 — Capital asset defined
- 26 U.S.C. § 1222 — Other terms relating to capital gains and losses
How It Works
The holding period begins the day after you acquire an asset and includes the day of sale (IRC § 1223). Sold on exactly the one-year anniversary — 365 days — is short-term; sold one day later is long-term. An asset purchased January 5 must be held until at least January 6 of the following year for long-term treatment. The rule is binary with no transition zone: the same $100,000 gain taxed at 37% on day 365 is taxed at 20% on day 366 for a top-bracket taxpayer — a $17,000 difference on a single additional day of holding.
Netting follows a prescribed sequence under IRC § 1222: short-term gains and losses net against each other first, producing a net short-term position; long-term gains and losses net separately, producing a net long-term position. The two results then net against each other. Net short-term losses can offset long-term gains — providing savings at the ordinary income rate against gains that would otherwise be taxed at the preferential long-term rate, making short-term losses more valuable than long-term losses when you have short-term gains to offset. Net capital losses of any type, after exhausting all gains, can offset up to $3,000/year of ordinary income ($1,500 for married filing separately), with unlimited carryforward of any excess.
Day trading — entering and exiting positions within a single session or over short holding windows — produces exclusively short-term gains taxed at ordinary income rates. At the 37% bracket plus 3.8% NIIT, every profitable trade carries a 40.8% federal rate. Options have their own holding period mechanics: buying and later selling a call or put creates short-term or long-term gain based on the option's own holding period, not the underlying security's. Written (short) options — selling calls or puts — always generate short-term gains or losses when they close or expire, regardless of how many months the position was open, because the tax code treats short-option positions as never reaching long-term holding period status.
Note: Investors considering "mark-to-market" status under IRC § 475(f) — which converts capital gains to ordinary income but allows unlimited loss deductions — must elect by the return due date for the preceding tax year. See a tax adviser before electing.
How It Affects You
If you're considering selling an investment you've held less than a year: The tax cost of selling one day early can be massive. An investor in the 22% federal income tax bracket selling a $50,000 gain at 11 months pays $11,000 in federal tax (22% STCG). Waiting until 13 months drops the tax to $7,500 (15% LTCG) — a $3,500 savings on two additional months of holding. At the 37% bracket with NIIT, the same gain costs $20,400 short-term vs. $11,900 long-term — a $8,500 difference. The holding period begins the day after acquisition and runs through the day of sale. An asset bought on January 5, 2025 must be held until January 6, 2026 to qualify as long-term — selling on January 5, 2026 (exactly one year) is still short-term.
If you're an active trader or frequent buyer and seller: Every gain on a position held one year or less is taxed as ordinary income — at your full marginal rate. A trader in the 24% bracket pays 24% on every short-term gain; above $200,000 MAGI, the 3.8% NIIT applies as well, bringing the combined rate to 27.8%. The long-term capital gains rate for the same bracket is 15% — a 12.8 percentage point gap. On $100,000 of annual trading gains, that difference is $12,800/year in extra federal taxes. Transaction frequency creates compounding tax drag that is very difficult to overcome with higher pre-tax returns. If frequent trading is part of your strategy, run the after-tax return math including all transaction costs and tax impact, not just the pre-tax return.
If you're harvesting tax losses: A short-term capital loss has higher tax value than a long-term capital loss when it's offsetting short-term gains. Short-term losses first offset short-term gains (taxed at ordinary rates), then can offset long-term gains (taxed at preferential rates). If you have $10,000 in unrealized short-term losses and $10,000 in short-term gains, harvesting the loss saves approximately $2,200-$3,700 depending on your bracket — compared to only $1,500-$2,380 if the loss offset long-term gains. Be aware of the wash sale rules: selling at a loss and buying a "substantially identical" security within 30 days before or after disallows the loss. Crypto does not have a wash sale rule yet, but legislation to extend it is an active risk.
If you have net capital losses in a given year: Capital losses offset capital gains dollar-for-dollar. After all gains are exhausted, up to $3,000 of net capital losses can offset ordinary income per year ($1,500 for married filing separately). Excess losses carry forward indefinitely. In a year with heavy market losses, the $3,000 ordinary income offset is modest but meaningful — at 24%, it saves $720. The larger value is the carryforward: if you harvest $30,000 in losses, you have 10 years of $3,000 ordinary income offsets (saving $720-$1,110/year) and can immediately offset future capital gains dollar-for-dollar. Document your loss carryforward on Schedule D each year — it follows you indefinitely even through significant income changes.
State Variations
Most states tax short-term gains as ordinary income. Same variation as state capital gains treatment generally — 0% in no-income-tax states to 13.3% in CA.
Implementing Regulations
- 26 CFR Part 1 — Income tax regulations (§§ 1.1221-1 through 1.1223-1 — definition of capital assets, holding period, short-term vs. long-term classification, netting rules)
Pending Legislation
- HR 1857 (Rep. Davidson, R-OH) — Capital Gains Inflation Relief Act of 2025: would index long-term capital gains for inflation, widening the tax advantage of holding periods and increasing the penalty of short-term trading. Status: Introduced.
- S 798 (Sen. Cruz, R-TX) — Capital Gains Inflation Relief Act of 2025: Senate companion, indexes long-term gains for inflation on stocks, digital assets, and business property held over three years. Status: Introduced.
- S 2047 (Sen. Ricketts, R-NE) — No Capital Gains Allowance for American Adversaries Act: treats gains from adversary-nation assets as ordinary income regardless of holding period. Status: Introduced.
Recent Developments
- Top rate remains 40.8% (37% + 3.8% NIIT) in 2026: High earners still face a combined maximum federal short-term capital gains rate of 40.8% under current law. Proposals to raise the top ordinary rate or otherwise narrow the short-term/long-term spread have not been enacted as of April 6, 2026.
- Crypto as property — all short-term gains remain fully taxable: IRS treats cryptocurrency as property (Notice 2014-21, confirmed in subsequent guidance). Crypto sold within a year of acquisition is taxed at ordinary income rates — the same 10%–37% brackets as stocks and other assets. (Note that NFTs and bullion-backed funds may instead be taxed at the collectibles 28% rate.) The Infrastructure Investment and Jobs Act (2021) and subsequent legislation expanded crypto reporting requirements (new Form 1099-DA), meaning crypto short-term gains will be increasingly reported directly to IRS starting in 2025-26. If you've been underreporting crypto trading gains, this creates growing audit exposure.
- Wash sale rules — no crypto exception (yet): Unlike stocks, crypto is not subject to wash sale rules under current law, allowing crypto investors to harvest losses and immediately repurchase — a significant advantage for tax planning. However, multiple bills in recent Congresses have proposed extending wash sale rules to crypto. This remains an active legislative risk: if enacted, the strategy disappears immediately.
- Day trader status elections: Active day traders may elect "mark-to-market" accounting under IRC § 475(f), converting capital gains (including short-term) into ordinary income but allowing unlimited loss deductions (not subject to the $3,000 annual capital loss limit). This election has strict requirements and deadlines — it must be made by the tax return due date (plus extensions) for the prior tax year.