What is short-term gain?

Short-term gain means a capital gain or a profit from the sales of personal assets or investments held for one year or less.

Long-term gains are the profit from the sale or transfer of assets owned or held for more than a year. 

Short-term capital gain is calculated by calculating the difference between the asset's sale price and purchase price. 

As the short-term gain definition implies, it is an investment that lasts one year or less and is calculated from the day the asset is acquired to the day it’s sold. 

Short-term capital gain example

A short-term capital gain occurs when, for example, a person who bought Alphabet (GOOGL) stock for $2,315.50 on 19 April 2021 sold it a year later at $2,610.62 on 19 April 2022. The investor received a short-term capital gain of $295.12. 

A short-term gain is taxed as ordinary income. As a result, short-term capital gains tax is imposed at the same rate as personal income. Individual income tax rates in the United States range from 10% to 37% in 2022, depending on household income, according to the IRS.

In terms of taxation, there is a key difference between short-term and long-term capital gains. Long-term capital gains are at a taxed lower rate.

While short-term capital gains are treated as ordinary income, long-term gains are subject to graduated taxable income thresholds of 0%, 15% and 20%. Taxpayers who report long-term capital gains are typically subject to a 15% or lower tax rate.

Because long-term capital gains are generally taxed at a lower rate than short-term capital gains, holding assets for a year or more can help taxpayers reduce their capital gains tax. 

What if investors or taxpayers suffered losses from their investment? 

Single taxpayers can claim taxable capital loss of up to $3,000 and $1,500 for married taxpayers who file tax reports separately in ordinary income. If there is an excess of taxable losses above $3,000, the losses can be carried forward to offset ordinary taxable income in later years. 

People who make short-term gains from an investment in an individual retirement account (IRA) are not subject to any short-term gain taxes on that income. They have to pay taxes if they withdraw money from the IRA because it will be considered income and subject to the taxpayer’s ordinary income tax rate.