Short-Term Gain

A short-term gain refers to a profit realized from the sale of an asset held for one year or less. Short-term gains are typically subject to higher taxes than long-term gains, as they are taxed at the individual's ordinary income tax rate rather than the lower capital gains tax rate. Short-term gains can result from the sale of stocks, bonds, or other assets within a short period, usually due to rapid price appreciation or market volatility.

Example

An investor buys 100 shares of a stock at $20 per share and sells them two months later at $25 per share, realizing a short-term gain of $500.

Key points

• Profit from the sale of an asset held for one year or less.

• Taxed at the higher ordinary income tax rate.

• Common in active trading and short-term investment strategies.

Quick Answers to Curious Questions

Why are short-term gains taxed at a higher rate than long-term gains?

Short-term gains are treated as ordinary income, subjecting them to higher tax rates to discourage excessive short-term speculation.

How do short-term gains impact active traders differently than long-term investors?

Active traders may face higher taxes on profits, reducing their overall returns compared to long-term investors.

What strategies can investors use to minimize taxes on short-term gains?

Investors may focus on holding assets for more than a year to qualify for lower long-term capital gains tax rates.