A short-term capital gain is a profit from selling a capital asset held for 12 months or less. Short-term gains are taxed at the taxpayer's ordinary income tax rates (10%–37% in 2025).
Holding period rule: - Purchase date: April 1, Year 1. - To achieve long-term treatment: Must sell after April 1, Year 2 (hold more than 12 months). - If sold on or before April 1, Year 2: Short-term gain.
Why short-term vs. long-term matters: The difference in tax rates is substantial. A high-income taxpayer might pay 37% on a short-term gain versus 20% (+ 3.8% NIIT = 23.8%) on a long-term gain — a difference of over 13 percentage points.
Tax planning strategies: - Delay selling to convert short-term gains into long-term (if the investment thesis still holds). - Tax-loss harvesting: Realize losses to offset short-term gains preferentially (since short-term gains are taxed at higher rates, they benefit most from offset).
Character of gain is determined by holding period: The character of a gain from a partnership or trust passed through to an investor retains its character (short-term or long-term) as determined at the entity level.
Netting rules: Net short-term gains and losses first. Net long-term gains and losses separately. If one is net positive and the other is net negative, they are netted against each other.
> Exam tip: Short-term = ordinary income rates (up to 37%). Always more tax-efficient to hold >12 months for long-term treatment. The "more than 12 months" rule (not exactly 12) catches many taxpayers off-guard.