Short-Term Capital Gain

What it means

When you sell company stock for more than what it was worth when you received it, the profit is called a capital gain. If you sell that stock after owning it for one year or less, the IRS calls it a short-term capital gain.

These gains are not treated like special investment profits. Instead, the government adds this money to your regular paycheck earnings. This means it is taxed at your ordinary income tax rate, which can be as high as 37%. Depending on your income, you may also pay an extra 3.8% for the Net Investment Income Tax (NIIT).

A simple example

Imagine Alex receives company shares as part of their pay. On the day the shares land in their account, they are worth $1,000. This is the cost basis, or the starting value used for taxes. Six months later, the stock price rises and Alex sells the shares for $1,200. Alex made a $200 profit. Because Alex held the shares for less than a year, that $200 is taxed as a short-term capital gain at Alex's normal income tax rate.

Why it matters to you

• You will pay more in taxes compared to long-term gains, which have lower tax rates.
• High earners might be hit with an additional 3.8% tax surcharge.
• If you plan to sell, consider waiting until you have held the stock for more than a year to potentially lower your tax bill.

Common mistakes to avoid

• Forgetting that short-term gains are taxed just like your regular salary.
• Not setting aside extra money for taxes, since these gains are often not subject to automatic withholding by your employer.

Words used on this page

• Capital Gain: The profit made when you sell an asset for more than its starting value.
• Cost Basis: The value of the stock used to calculate how much profit you made.
• Ordinary Income: Money you earn from working, which is taxed at standard government rates.
• NIIT: An extra 3.8% tax on investment income for people with higher earnings.
• Withholding: Money taken out of your pay automatically by your employer to cover taxes.