What it is:
Short-term gain usually refers to the sale of an that has been held less than a certain IRS-defined period of time.on the
How it works/Example:
Let’s assume you purchase 100 shares of Company XYZ for $1 per share. After three months, the share price increases to $5. This means the value of the has increased from $100 to $500, for a capital gain of $400.
Taxpayers report capital gains on IRS Schedule D, but these gains are subject to different tax rates depending on whether they are short-term or long-term (and in some cases depending on the type of ). In the example above, if you sold the Company XYZ shares after a year, the IRS would consider your $400 a long-term capital gain and tax it at one of several flat rates. However, if you sold the Company XYZ shares after just three months, the IRS would consider your $400 profit a short-term capital gain and tax that $400 at your ordinary income , which varies by several factors, including which state you live in, and is generally higher than the long-term rate.
Why it matters:
Establishing a higher capital gains encourages long-term , but there are still many logical reasons why an investor might want to sell an before a year has passed.
An investor’s capital losses sometimes offset all or a portion of his or her capital gains, lowering the investor’s tax bill. There is a limit, however, to how much the investor can offset. Investors should seek the advice of a competent tax professional to understand how affects specific decisions.