Short-Term Capital Gains Definition & Tax Brackets

Short-Term Capital Gains Definition


Short-term capital gains are investments that are held for less than 12 months and are sold.  Short-term capital gains are common with active traders and are taxed in a higher bracket.

Short-term capital gains Formula

Remember this formula is applicable to securities that have a holding period of less than 12 months.

Short-term capital gains = Purchase Value - Current Asset Value

Short-term capital gains Tax Brackets

The government places a higher tax bracket on short-term capital gains since the investor is not looking to make a long-term commitment to the health of the company.  This trader is however, simply looking to make a quick profit on the movement of the stock.  Hence the goverment views this transaction as part of the yearly income and not an investment.  So, traders that take place in active trading will be taxed at their current income bracket.  Because again, these trades are viewed as income generating activities for a calendar year and not a long-term investment. Below are the capital gains tax brackets for 2007.  Please note these numbers will adjust depending on the outcome of the 2008 U.S. Presidential Election.

  1. Short-term capital gains are taxed at the investor's personal income tax rate

Short-Term Capital Gains Example

Let's say that an investor purchased $100,000 worth of an oil stock in the February 2008.  The trader saw the oil market topping and closed out the position in August 2008.  The investor initially purchased the stock at $50 per share and the stock is now worth $100.  This means the trader would have made $100,000 ($50 profit per share * 2,000 shares).  This means that the investor now has a short-term capital gains tax responsibility of $100,000.  Let's assume this investor is in the 33% personal income tax bracket.  So, in this example, the investor would be responsible for $33,000 ($100,000 * 33%).  Hence the traders after tax income would be $67,000 on the trade.


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