Short-Term Capital Gain

Definition

A short-term capital gain is the profit resulting from the sale of a capital asset, such as real estate, stocks, or bonds, that has been held for less than 12 months. The gain is calculated as the difference between the sale price and the original purchase price (basis) of the asset. Unlike long-term capital gains, which benefit from reduced tax rates, short-term capital gains are taxed as ordinary income, based on the individual’s or entity’s specific income tax bracket.

Characteristics

Holding Period: Less than 12 months.
Tax Rate: Taxed as ordinary income.
Examples of Capital Assets: Real estate, stocks, bonds, precious metals, collectibles.

Examples

Real Estate Sale:
- An investor buys a parcel of land for $50,000 and sells it for $60,000 after holding it for 8 months. The $10,000 profit is a short-term capital gain.
Stock Trading:
- A trader purchases shares for $5,000 and sells them for $7,000 after holding them for 6 months. The $2,000 profit is considered a short-term capital gain.
Cryptocurrency:
- An investor buys $1,000 worth of cryptocurrency, which appreciates and is sold for $1,500 after 3 months. The $500 profit is a short-term capital gain.

Frequently Asked Questions (FAQs)

Q1: How is a short-term capital gain taxed? A1: Short-term capital gains are taxed as ordinary income. This means the gain is added to your taxable income for that year and taxed according to your current income tax bracket.

Q2: Can short-term capital losses offset short-term capital gains? A2: Yes, short-term capital losses can offset short-term capital gains. If the losses exceed the gains, they can also offset up to $3,000 of other income annually, with any remaining loss carried forward to future years.

Q3: Do I need to pay state taxes on short-term capital gains? A3: It depends on the state. Some states also tax short-term capital gains as ordinary income, while others may have different rules.

Q4: Are there any exemptions or deductions for short-term capital gains? A4: Generally, there are no specific exemptions or deductions available for short-term capital gains. These gains are fully taxable as ordinary income.

Q5: Is the gain calculated before or after transaction fees? A5: The gain is calculated after transaction fees and any other costs associated with the purchase and sale of the asset.

Capital Asset: Any property or investment, including real estate, stocks, and bonds, held by an individual or business.
Long-Term Capital Gain: Profits from the sale of a capital asset held for longer than 12 months, typically taxed at lower rates than short-term capital gains.
Holding Period: The amount of time an asset is held from the date of purchase to the date of sale.
Ordinary Income: Income earned from providing services and the performance of day-to-day business, taxed at regular tax rates.

Online Resources

References

Internal Revenue Service (IRS) Publication 544, “Sales and Other Dispositions of Assets.”
“Fairmark Tax Guide for Investors” by Kaye Thomas.

Suggested Books for Further Studies

“J.K. Lasser’s Your Income Tax” by J.K. Lasser
“Taxes Made Simple: Income Taxes Explained in 100 Pages or Less” by Mike Piper
“The Tax and Legal Playbook: Game-Changing Solutions to Your Small-Business Questions” by Mark J. Kohler

Real Estate Basics: Short-Term Capital Gain Fundamentals Quiz

### What qualifies as a short-term capital gain? - [ ] Profit from the sale of an asset held for more than 12 months. - [x] Profit from the sale of an asset held for less than 12 months. - [ ] Profit from the sale of any property regardless of the holding period. - [ ] All of the above. > **Explanation:** A short-term capital gain results from the sale of an asset held for less than 12 months. ### How are short-term capital gains taxed? - [ ] At a flat 15% rate. - [x] As ordinary income. - [ ] At a reduced capital gains rate. - [ ] They are not taxed. > **Explanation:** Short-term capital gains are treated as ordinary income and are taxed at the individual's income tax rate. ### Which of the following is an example of a short-term capital gain? - [ ] Selling land after holding it for 2 years. - [ ] Selling shares after holding them for 14 months. - [x] Selling cryptocurrencies after holding them for 6 months. - [ ] Selling a home after living in it for over a year. > **Explanation:** Selling cryptocurrencies held for 6 months is a short-term capital gain as the holding period is less than 12 months. ### Can short-term capital losses offset short-term capital gains? - [x] Yes, they can offset gains. - [ ] No, losses have no effect on gains. - [ ] Only if the asset was held for at least 1 month before sale. - [ ] Only under specific circumstances related to asset type. > **Explanation:** Short-term losses can offset short-term gains to reduce the taxable amount. ### What happens to short-term capital losses if they exceed short-term capital gains? - [ ] They are discarded. - [x] They can offset up to $3,000 of other income annually. - [ ] They can only be used in future tax years. - [ ] They result in no tax benefit. > **Explanation:** If short-term losses exceed short-term gains, they can offset up to $3,000 of other income annually, with any excess carried forward. ### What is the holding period for an asset in order for the gain to be classified as a long-term capital gain? - [ ] Less than 3 months. - [ ] More than 6 months. - [ ] Exactly 12 months. - [x] More than 12 months. > **Explanation:** For gains to be classified as long-term, the asset must be held for more than 12 months. ### Which tax bracket is used for short-term capital gains? - [ ] A flat capital gains rate. - [x] The individual's ordinary income tax bracket. - [ ] The corporate tax rate. - [ ] The estate tax rate. > **Explanation:** Short-term capital gains are taxed using the ordinary income tax bracket of the individual. ### Why are short-term capital gains usually taxed at a higher rate than long-term gains? - [ ] Short-term investments are always riskier. - [x] They do not benefit from the preferential tax rates given to long-term gains. - [ ] The assets are not valuable enough. - [ ] Tax laws favor salary income over investment income. > **Explanation:** Short-term capital gains are taxed at a higher rate because they do not benefit from preferential tax rates that long-term gains do. ### In what scenario is a short-term capital gain realized? - [ ] When property is rented out for income. - [x] When a capital asset is sold within 12 months at a profit. - [ ] During the depreciation of asset value. - [ ] When dividends are received. > **Explanation:** A short-term capital gain is realized when a capital asset is sold within 12 months at a profit. ### Which of the following states something false about short-term capital gains? - [ ] They are taxable at ordinary income rates. - [ ] They can be offset by short-term capital losses. - [ ] They result from selling an asset held for less than 12 months. - [x] They have lower tax rates compared to long-term capital gains. > **Explanation:** Short-term capital gains do not benefit from lower tax rates; they are taxed at the higher ordinary income rates.