Short-Term Capital Gains

What Are Short-Term Capital Gains?

Short-term capital gains are profits from selling a capital asset (including stock) that you held for one year or less. Unlike long-term capital gains, which benefit from preferential tax rates (0%, 15%, or 20%), short-term capital gains are taxed at your ordinary income tax rates — the same rates applied to your salary and wages. For high-income earners in states like California or New York, this can mean combined federal and state tax rates exceeding 50% on short-term gains.

The holding period begins the day after you acquire the asset and ends on the day you sell. If you sell on or before the one-year anniversary of acquisition, the gain is short-term. If you sell after the one-year anniversary, the gain qualifies as long-term.

How Short-Term Capital Gains Work

Tax Rates

Short-term capital gains are added to your other ordinary income and taxed at your marginal rate. For 2025, federal income tax brackets for single filers are:

• 10%: up to $11,925
• 12%: $11,926 to $48,475
• 22%: $48,476 to $103,350
• 24%: $103,351 to $197,300
• 32%: $197,301 to $250,525
• 35%: $250,526 to $626,350
• 37%: over $626,350

A large short-term capital gain can push you into a higher bracket, increasing the rate on the gain and potentially on other income.

Net Investment Income Tax

Short-term capital gains are also subject to the 3.8% Net Investment Income Tax (NIIT) if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). This effectively adds 3.8% to the tax rate on investment gains.

Offsetting Gains with Losses

Short-term capital losses offset short-term capital gains first, dollar for dollar. Net short-term losses can then offset long-term capital gains. If you have net capital losses after offsetting all gains, you can deduct up to $3,000 per year against ordinary income, with the remainder carried forward to future years.

Practical Implications for Startup Employees

Same-Day Sale or Early Sale of Exercised Shares

If you exercise stock options and sell the shares within one year, any gain above your cost basis is a short-term capital gain (for shares where the spread was already taxed as ordinary income, the cost basis starts at FMV, so the short-term gain is only the appreciation after exercise).

Disqualifying Dispositions

Selling ISO shares before meeting the qualifying disposition holding periods (one year from exercise, two years from grant) creates a disqualifying disposition. The spread at exercise is treated as ordinary income (not a short-term capital gain), and any additional gain above the exercise-date FMV is a short-term or long-term capital gain depending on how long you held the shares after exercise.

Tax Impact of Holding Period

The difference between short-term and long-term capital gains rates can be dramatic. On a $500,000 gain, the tax difference between short-term (37% + 3.8% NIIT + state) and long-term (20% + 3.8% NIIT + state) rates can exceed $85,000 in federal tax alone. This makes the one-year holding period a critical planning threshold.

Wash Sale Complications

If you sell stock at a loss and repurchase substantially identical stock within 30 days before or after the sale, the wash sale rule disallows the loss. This is relevant if you are selling equity compensation shares at a loss and plan to repurchase through an ESPP or option exercise.

How It Relates to Exercising Stock Options

The holding period for capital gains purposes starts on the exercise date. If you exercise and sell within one year, you face short-term capital gains rates on any appreciation above your cost basis. If you can hold for more than one year after exercise, the gain qualifies for the lower long-term rates. This timing consideration is a fundamental factor in exercise planning — especially for employees at companies approaching an IPO or acquisition, where the desire for immediate liquidity must be weighed against the significant tax savings of holding for long-term treatment.