Short-term capital gain tax is a tax on the profit made from selling an asset within a year of its purchase. In the US, this type of gain is taxed as ordinary income, meaning the rate you’ll pay depends on your federal income tax bracket.
What Is Short-Term Capital Gain Tax?
In the context of the US tax system, short-term capital gain tax applies to profits from the sale of assets like stocks, bonds, mutual funds, and property, if these are sold within a year of purchase. The tax rate aligns with your income tax bracket, which can range from 10% to 37% based on your taxable income.
Key Facts About Short-Term Capital Gains Tax:
- Tax Rates: The rate is based on your ordinary income tax bracket. For example, if you fall into the 24% tax bracket, your short-term capital gains will also be taxed at 24%.
- Assets Covered: This tax applies to nearly all assets, including stocks, bonds, and property. The key determinant is the holding period of the asset, which must be less than one year for the gains to be considered short-term.
- Calculation Example: If you bought stock worth $1,000 and sold it for $1,200 within a year, your short-term capital gain is $200. This $200 is taxed according to your income tax bracket.
- Real Estate Considerations: Short-term gains on real estate are also taxed as ordinary income. For example, if you buy a property and sell it within a year at a profit, that profit is subject to short-term capital gains tax.
Short Term Capital Gain Tax Rates for 2024
The tax rates for short-term capital gains in 2024 remain aligned with the ordinary income tax brackets. For instance, if your taxable income is less than $40,525 (for a single filer), your short-term capital gains are taxed at 10%. As your income increases, so does the tax rate on your short-term gains.
STCG Tax On Stocks & Mutual Funds
For stocks and mutual funds, the short-term capital gains tax applies if these are sold within a year of purchase. The gain is the difference between the sale price and purchase price and is added to your ordinary income and taxed accordingly.
Calculating Short-Term Capital Gain Tax
To calculate the short-term capital gain tax on the sale of stocks or other assets:
- Determine the sale price of the asset.
- Subtract the purchase price from the sale price to find the gain.
- Apply your ordinary income tax rate to this gain to estimate the tax.
Saving on Short-Term Capital Gain Tax
While short-term capital gains are taxed as ordinary income, there are strategies to minimize this tax. These include offsetting gains with capital losses, holding assets for longer than a year to qualify for long-term capital gains tax rates, or considering retirement accounts like IRAs or 401(k)s where gains aren’t taxed until withdrawal.
Bottom Line
It’s crucial for both employees and self-employed individuals to track their capital gains and understand their tax implications. Using online calculators can simplify estimating your short-term capital gains tax liability. Being aware of how these gains affect your tax situation can aid in more informed financial planning and investment decisions.
