Short-Term Capital Gains Tax: Complete Guide for Traders

Short-term capital gains are one of the most expensive forms of investment income from a tax perspective. If you are an active trader, day trader, or swing trader, understanding short-term capital gains taxes is essential for planning your trading strategy and keeping more of your profits.

What is a Short-Term Capital Gain?

A short-term capital gain is profit from selling an asset that you held for one year or less. This includes stocks, options, cryptocurrencies, and other investments sold within 365 days of purchase. Unlike long-term gains, short-term gains are taxed at your ordinary income tax rate.

2026 Short-Term Capital Gains Tax Rates

Since short-term gains are taxed as ordinary income, the rates depend on your tax bracket:

The True Cost of Short-Term Trading

Let us compare the tax impact of short-term versus long-term gains:

Who Pays Short-Term Capital Gains?

Several types of traders and investors frequently incur short-term capital gains:

• Day traders: All profits are short-term by definition
• Swing traders: Trades lasting days to weeks
• Options traders: Most options are held less than a year
• Cryptocurrency traders: Frequent trading generates short-term gains
• Active stock traders: Frequent buying and selling

Net Investment Income Tax

High-income traders may also owe the 3.8% Net Investment Income Tax (NIIT) on top of ordinary income rates. This applies when your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).

Self-Employment Tax Considerations

Unlike business income, capital gains are generally not subject to self-employment tax. However, if you qualify for trader tax status and make the mark-to-market election, your gains become ordinary business income, which may have different implications.

Strategies to Reduce Short-Term Gains Taxes

1. Hold Longer When Possible

If a trade is close to the one-year mark, consider whether holding a bit longer makes sense from a tax perspective.

2. Harvest Losses Strategically

Short-term losses first offset short-term gains. Actively harvesting short-term losses can reduce your highest-taxed gains.

3. Use Tax-Advantaged Accounts

Active trading in IRAs or 401(k)s avoids immediate tax consequences. However, you lose the ability to deduct losses.

4. Consider Trader Tax Status

Qualifying for trader tax status with the mark-to-market election allows you to deduct trading losses against ordinary income without the $3,000 limitation.

5. Time Your Sales

If possible, realize gains in years when your income is lower, potentially reducing your marginal rate.

Short-Term Gains and Options

Options have unique tax rules:

• Options held less than a year: Short-term capital gains or losses
• Options that expire worthless: Short-term capital loss
• Exercised options: The holding period for the stock begins at exercise
• Assigned options: Affects the cost basis of the stock sold or purchased

Estimated Tax Payments

Active traders often need to make quarterly estimated tax payments. If you do not withhold enough taxes throughout the year, you may owe penalties.

Record Keeping for Short-Term Traders

Proper record keeping is crucial for active traders:

• Track every trade: Date, time, security, quantity, price, fees
• Calculate cost basis: Use FIFO, LIFO, or specific identification
• Monitor holding periods: Know which shares qualify as long-term
• Track wash sales: Disallowed losses must be added to cost basis
• Keep 1099-B forms: Verify broker-reported information

State Taxes on Short-Term Gains

Most states tax capital gains as ordinary income, which means short-term gains face the full state income tax rate. Some states to note:

• No income tax: Texas, Florida, Nevada, Washington, Wyoming, South Dakota, Alaska
• High-tax states: California (up to 13.3%), New York City (up to 14.8% combined), New Jersey (up to 10.75%)

Common Mistakes to Avoid

• Not tracking cost basis: Leads to incorrect gain calculations
• Ignoring wash sales: Disallowed losses you thought you could deduct
• Missing estimated payments: Results in penalties and interest
• Not separating long vs. short: May miss lower long-term rates
• Poor record keeping: Makes tax filing difficult and increases audit risk

When Short-Term Trading Makes Sense

Despite higher taxes, short-term trading can be worthwhile when:

• Profits are large enough: Even after taxes, the profit justifies the trade
• Risk management requires it: Holding for taxes is not worth the risk
• Trading is your profession: Consistent profits with trader tax status
• Market conditions demand it: Taking profits before potential reversal
• You have offsetting losses: Short-term losses offset short-term gains

Summary

Short-term capital gains are taxed at ordinary income rates, which can be as high as 37% (plus 3.8% NIIT and state taxes). While this tax treatment is less favorable than long-term gains, active traders can manage their tax burden through loss harvesting, proper planning, and potentially qualifying for trader tax status. The key is understanding the true cost of short-term trading and factoring taxes into your trading decisions.

Learn more about trading taxes in our guides on trader tax status and options tax treatment.