Short-Term Capital Gain.
A definition, in plain English — with the books that teach it.
What it means
A short-term capital gain arises when an investor sells a capital asset — such as a stock, bond, real estate, or collectible — that has been held for one year or less, and the sale price exceeds the adjusted cost basis. Under U.S. federal tax law, short-term capital gains are taxed at ordinary income rates rather than the preferential long-term capital gains rates, meaning the tax cost can be substantially higher depending on the investor's income bracket. For high earners, ordinary income rates reach 37% federally, plus applicable state income taxes — a combined marginal rate that can exceed 50% in high-tax states such as California or New York. The one-year holding threshold creates a powerful financial incentive to defer realizing gains until the long-term rate applies. For most middle-income investors, the difference between short-term and long-term rates is 10 to 20 percentage points, which is a significant drag on after-tax returns if trades are made without consideration of holding periods. Day traders, active traders, and momentum investors who turn over positions rapidly face this tax cost on every profitable position. In taxable accounts, the short-term gain tax exposure is a meaningful argument for low-turnover investment strategies — whether passive indexing or buy-and-hold equity investing — that allow gains to season into long-term territory before realization.
Example
An investor buys 100 shares of a stock at $80 per share in March and sells them in October of the same year at $120 per share, generating a $4,000 short-term capital gain. In the 32% federal income tax bracket, the investor owes $1,280 in federal tax on this gain. Had the investor held the shares past the one-year mark and realized the same $4,000 gain as a long-term capital gain, the federal tax would have been $600 at the 15% rate — a $680 savings from waiting.