Capital gains tax generally applies when you sell an investment or asset for more than what you paid for it. In other words, any profits resulting from the sale are considered taxable in the eyes of the Internal Revenue Service. Whether you pay the short-term capital gains tax rate or long-term capital gains tax depends on how long you hold the investment before selling it. Short-term capital gains are subject to ordinary income tax rates, which are set by law and overseen by the IRS.
The tax code can be confusing, which is why working with afinancial advisorwith tax expertise can help give you peace of mind.
What Is Short-Term Capital Gains Tax?
The short-term capital gains tax is a levy on gains resulting from the sale of assets you’ve held for one year or less. The short-term capital gains tax is typically applied to the sale of securities, including stocks and mutual funds. But it’s also possible to be assessed short-term capital gains tax on the sale of other assets, such as real estate, vehicles or collectibles.
Say you’re interested in flipping homes for profit, for example. You buy a home, invest some money in fixing it up, and then sell it for a $40,000 profit six months later. If you held the home for one year or less then you might owe short-term capital gains tax on the proceeds from the sale. The same may be true if you buy and sell antique cars as a hobby or side hustle.
So why does capital gains tax exist? One simple reason: the IRS assesses this tax as a means of raising revenue for the government. This revenue is then used to fund government programs and spending.
How Short-Term Capital Gains Are Taxed
Short-term capital gains are calculated by finding the difference between the original price of the asset or its cost basis and the price at which you sold it. When the difference is calculated that final number is taxed according to the marginal tax rate of the individual taxpayer. This means that the tax is assessed based on your income and tax filing status.
Short-Term Capital Gains Tax Rates 2024 and 2023
The IRS uses ordinary income tax rates to tax capital gains. That means the tax on any investments you sell on a short-term basis would be determined by your tax bracket. Your tax bracket is based on your income and filing status.
Here’s how short-term capital gains tax rates for 2024 compare by filing status:
Short-Term Capital Gains Tax Rates 2024
| Rate | Single filers | Married couples filing jointly | Head of household |
|---|---|---|---|
| 10% | Up to $11,600 | Up to $23,200 | Up to $16,550 |
| 12% | $11,600 – $47,150 | $23,200 – $94,300 | $16,550 – $63,100 |
| 22% | $47,150 – $100,525 | $94,300 – $201,050 | $63,100 – $100,500 |
| 24% | $100,525 – $191,950 | $201,050 – $383,900 | $100,500 – $191,950 |
| 32% | $191,950 – $243,725 | $383,900 – $487,450 | $191,950 – $243,700 |
| 35% | $243,725 – $609,350 | $487,450 – $731,200 | $243,700 – $609,350 |
| 37% | $609,350+ | $731,200+ | $609,350+ |
For reference, here are the short-term capital gains tax rates for 2023:
Short-Term Capital Gains Tax Rates for 2023
| Rate | Single filers | Married couples filing jointly | Head of household |
|---|---|---|---|
| 10% | Up to $11,000 | Up to $22,000 | Up to $15,700 |
| 12% | $11,000– $44,725 | $22,000 – $89,450 | $15,700 – $59,850 |
| 22% | $44,725– $95,375 | $89,450 – $190,750 | $59,850– $95,350 |
| 24% | $95,375 – $182,100 | $190,750 – $364,200 | $95,350 – $182,100 |
| 32% | $182,100 – $231,250 | $364,200 – $462,500 | $182,100 – $231,250 |
| 35% | $231,250 – $578,125 | $462,500 – $693,750 | $231,250 – $578,100 |
| 37% | $578,125+ | $693,750+ | $578,100+ |
Any short-term gains you realize are included with your other sources of income for the year for tax purposes. So if you have $20,000 in short-term gains and earn $100,000 in salary from your day job, the IRS considers your total taxable income to be $120,000.
It’s important to remember that the U.S. uses a progressive tax system. This means that the same ordinary income tax rate may not apply to your total income for the year if it includes short-term capital gains. If you have earned income from working as well as short-term capital gains from the sale of investments, it’s possible that multiple tax rates could be applied to determine what you owe.
In addition to federal short-term capital gains tax, you may also pay taxes on capital gains at the state level. Where you live can determine if you’re subject to short-term capital gains tax and whether you’ll pay a rate that’s equivalent to your ordinary income tax rate or below it.
Short-Term vs. Long-Term Capital Gains Tax
The long-term capital gains tax rate applies to investments that you sell for a profit after holding them for longer than one year. Between the short-term and long-term capital gains tax rates, the long-term rate is more favorable to investors. That’s because it’s not tied to your ordinary income tax bracket.Here’s what the long-term capital gains tax rate for 2024 looks like:
Long-Term Capital Gains Tax Rates 2024
| Rate | Single Filers, Taxable Income Over | Married Couples Filing Joint Returns, Taxable Income Over | Heads of Households, Taxable Income Over |
| 0% | $0 | $0 | $0 |
| 15% | $47,025 | $94,050 | $63,000 |
| 20% | $518,900+ | $583,750+ | $551,350+ |
And, for comparison, here are the long-term capital gains tax rates for 2023:
Long-term Capital Gains Tax Rates for 2023
| Rate | Single Filers, Taxable Income Over | Married Couples Filing Joint Returns, Taxable Income Over | Heads of Households, Taxable Income Over |
|---|---|---|---|
| 0% | $0 | $0 | $0 |
| 15% | $44,625 | $89,250 | $59,750 |
| 20% | $492,300+ | $553,850+ | $523,050+ |
As you can see, the long-term capital gains tax rates are lower overall compared to the short-term capital gains tax. And for some taxpayers, there may be no capital gains tax at all associated with the sale of investment securities or other assets.
How to Minimize Short-Term Capital Gains Tax
The tax bracket you land in is determined by your income and filing status. But it’s possible to minimize your short-term capital gains tax liability. Here are four common options you might consider for reducing your investment tax bill:
- Hold investments longer:Avoiding the short-term capital gains tax rate may be as simple as holding on to investments longer than a year. Whether this is realistic for you or not can depend on whether you’re an active day trader or you prefer a buy-and-hold approach to building a portfolio.
- Harvest losses:Tax-loss harvesting allows you to offset capital gains by selling some of your investments at a loss. This is a strategy you can apply inside a taxable brokerage account. However, losses may be harvested automatically if you’re using a robo-advisor to invest.
- Consider asset location:Asset allocation is important for creating a diversified portfolio but asset location matters from a tax perspective. Capital gains tax only applies to investments held in taxable brokerage accounts. So you may benefit from keeping some of your assets in a tax-advantaged account, such as a 401(k) or IRA.
- Reinvest dividends:Dividend reinvestment allows you to buy additional shares of stock without investing money out of pocket. If you have dividend-paying stocks, consider reinvesting dividends to bolster your portfolio so you’re less tempted to sell off your winners. Keep in mind, however, that dividends are still taxable even if they’re reinvested.
Your financial advisor or tax preparer may be able to offer additional solutions or guidance on how to manage your investment tax liability. And it’s also important to remember that investment taxes are one part of the puzzle.
Claiming tax credits or deductions could help put you in a lower tax bracket, which can mean paying less in short capital gains tax. For example, you may be able to deduct certain investment interest expenses when you file your taxes. Deductions reduce your taxable income while credits reduce your tax liability.
Bottom Line
Paying capital gains tax may be unavoidable in certain scenarios, but there are things you can do to minimize what you’ll pay for short-term gains. Creating an investment strategy that’s tax-diversified can help you to keep more of your gains over time.
Tips for Investing
- Preparing taxes and doing tax planning is sometimes best done with a professional. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started, get started now.
- If you don’t know whether you’re better off taking thestandard deductionversus itemizing your deductions, you might want to read up on it and do some math. Educating yourself before thetax return deadlinecan help you save a significant amount of money.
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