Short-Term Capital Gains Demystified

If you’ve ever done your taxes or discussed your taxes with your accountant, you’ve probably heard about short-term capital gains. 

In today’s blog, our accounting team demystifies short-term capital gains so you can better understand how this affects your wealth and income taxes as a high net worth individual..

What is a short-term capital gain?

A short-term gain occurs when you sell or transfer an asset, security, or investment you’ve owned for 12 months or less.

For example, you purchased 1,000 shares of stock from one publicly traded company on January 18, 2022, at $47 a share plus your fees for the transaction at a total of $48,000.

Over the course of six months, the stock rose to $54 a share, and you decided to sell them at $54,000 plus the brokerage fee. 

The profit you made from the investment, $5,000, would be taxed by the IRS as a short-term capital gain.

Your short-term capital gains are more than just for stocks. They could be for precious metals, real estate, and even cryptocurrencies.

How does the IRS handle short-term capital gains?

The IRS taxes your short-term capital gains as ordinary income, calculated using your personal income tax rate based on your income level.

How does a short-term capital gain turn into a long-term capital gain?

Hold on to the asset for more than a year. That’s why it’s important to maintain records of the purchase and sale of the asset.

Why would I want to hold on to an asset for more than a year?

Everyone’s situation is different, and you may choose to sell an asset before one year elapses.

However, if you can maintain the asset for more than one year, the IRS taxes long-term capital gains at a lesser tax rate.

For example, in 2021, the short-term capital gain rate for someone with a taxable income of $86,376 to $164,925 was 24% for someone filing as a single person.

The long-term capital gain rate for someone filing as single was just 20% for someone with income over $445,850.

Depending on your income level, you might save as much as 17% on income tax rates if you hold on to assets for over a year. 

Contact The Whitlock Co. for Financial Services for High Net Worth Individuals

The experienced team at The Whitlock Co. can help you manage short-term capital gains as a financial strategy along with income taxes.
Contact us to request a consultation, and we can discuss your unique financial situation.


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