Short-term gains refer to the profits realized from a capital asset that has been held for one year or less. "Capital gains" refer to profits from the sale of assets such as stocks, land, art, jewelry, or even a business. In 2020, the capital gains tax rate is between 0 and 20 percent in most cases. However, these tax rates are different for short-term gains.
What is a capital gain?
Let’s say you have a capital asset, a piece of land in this case, and you sell it for more than you paid for it. The resulting capital gain on that sale is what you’ll get taxed on. If that piece of land was only in your possession for a short time, the amount you’ll get taxed will reflect that and be based on your taxable income.
How is short-term gains tax calculated?
The tax on these short-term gains is tied to several factors, with the main two being how long you held that capital asset before you sold it and the current tax rate. Note that capital gains only occur when an asset is sold, and don't reflect price fluctuations in the time you owned that asset.
What is the short-term gains tax rate in 2020?
The current capital gains tax rates for 2020 are 0, 15, or 20 percent on any assets held for more than a year. Those that are short term (held for a year or less) fall into the income tax brackets of 10, 12, 22, 24, 32, 35, or 37 percent.
Short-term capital gains tax rates example
Let’s say you have $80,000 in taxable income from your salary and $5,000 from short-term investments. Your total taxable income would be $85,000. The $5,000 is a short-term capital gain and would be taxed at a higher rate than your salary, and may even bump your overall income into a higher tax bracket.
How to avoid short-term gains tax
It may be a good idea to reconsider selling an investment that has increased in value quickly. Holding that asset a little longer would shift the capital gain classification to long term and could mean a better return on investment.
Keep an eye on the market. See how prices of land, gold, or other assets fluctuate over the course of a year and calculate the way tax may factor into selling that asset. If the amount you gain and the amount you pay are close, waiting might be the better choice. Sell when the time is right.