Short-Term Gain

What Is a Short-Term Gain?

A short-term gain is a profit realized from the sale, transfer, or other disposition of personal or investment property (known as a capital asset) that has been held for one year or less. A short-term capital gain occurs when an investment is sold that's been held for less than one year, such as a stock. These gains are taxed as ordinary income, which is your personal income tax rate. 

A short-term gain can be compared to a short-term loss, and contrasted with a long-term gain.

Understanding Short-Term Gains

The amount of the short-term gain is the difference between the basis of the capital asset–or the purchase price paid to buy it–and the sale price received for selling it. Short-term gains are taxed at the taxpayer's top marginal tax rate. The 2020 and 2021 regular income tax brackets range from 10% to as high as 37%, depending on the investor's annual income. Conversely, long-term capital gains are taxed at a capital gains rate, which is often lower than a person's marginal tax rate. Long-term gains are the profits from an investment that's held for more than one year.

A short-term gain can only be reduced by a short-term loss. A taxable capital loss is limited to $3,000 for single taxpayers and $1,500 for married taxpayers filing separately. Short-term gains and losses are netted against each other.

For example, assume a taxpayer purchased and sold two different securities during the tax year: Security A and Security B. If the investor has earned a gain on Security A of $5,000 and a loss on Security B of $3,000, the net short-term gain is $2,000 = ($5,000 - $3,000).

Short-Term Gains and IRAs

Investors who earned short-term gains from an investment that was in an individual retirement account (IRA) do not have to pay any short-term capital gains taxes on that income. However, if an investor takes out any money from the IRA, the withdrawal amount is considered income and is taxed at the investor's or taxpayer's ordinary income tax rate.

The benefit to IRAs is that investors can grow their investments over the years without paying any capital gains taxes. In other words, the taxes on the gains are deferred, but once the money is withdrawn, it's taxed at the current income tax rate for that investor.

How to File a Short-Term Gain

Form 8949, Sales and Other Dispositions of Capital Assets is a form from the Internal Revenue Service (IRS) to report gains and losses from investments. The form has instructions to guide you on how to calculate and report short-term gains.

The upper portion of the form asks for the taxpayer's information such as name and social security number. The tax form also has two sections to be completed. The first section is for the short-term gains, and the second section is for any long-term investment gains. Typically, the IRS form Schedule D, Capital Gains and Losses would be used to report capital gains and losses. However, Form 8949 may also need to be completed outlining the net gain or losses so that the subtotals from this form can be carried over to the Schedule D form.

Special Considerations

Ordinary income is taxed at various rates depending on how much your income was for the year. The short-term gain will be taxed at the same rate as your ordinary income. The total from the gain is added to your income for the year. As a result, you could pay a higher tax on your short-term gain from your investment if it pushed your income into a higher tax bracket for your ordinary income. It's important to consult a tax professional before filing taxes on your short-term capital gains.