timothy sykes logo

Trading Psychology

Short-Term Capital Gains: Need to Know Before You Trade

Timothy SykesAvatar
Written by Timothy Sykes
Updated 4/18/2022 13 min read

If you have any plans of making money day trading, you need to know about the short-term capital gains tax.

This is non-negotiable. Every successful trader has to pay taxes. It’s illegal not to.

I know. Taxes are sort of a boring subject. But this is necessary information.

It reminds me of when I filmed my video on how to “Read SEC Filings” with Michael Goode, my first millionaire student.* It’s boring stuff but essential to understanding the market.

If you’re here to learn about taxes, you’ve probably made some money trading stocks or are expecting to. Also, note that this is all for informational purposes only. Have serious questions? Consult a licensed tax professional in your area. 

And remember to stay safe. Don’t let early profits inflate your ego or the market will humble you.

If you’re reading this before making money, that’s the right mindset. Always prepare for the future by studying and staying educated.

Everyone has to pay taxes. So getting a jump start on what you might expect can only help you in the future.

Let’s go over the short-term capital gains tax and what you should know before trading.

What Is a Short-Term Capital Gain?

short term capital gains
© Millionaire Media, LLC

When you sell a “capital asset” for a profit, that’s considered a capital gain.

Capital assets include stocks, bonds, real estate, and precious metals — just to name a few.

I trade penny stocks and teach my students to do the same. So I’m most interested in short-term capital gains for stocks.

If a trader sells a position for a profit, the money they make is taxable by the U.S. government.

A big factor that determines your capital gains tax rate is how long you held the asset.

Long vs. Short-Term Capital Gain: What’s the Difference?

The amount of time you hold a stock will influence your tax rate.

Any asset you hold for more than a year is long term. If you hold a stock for a year or less, that’s considered short term.

I’m a day trader, so I typically hold positions for a few minutes. Sometimes I’ll make a swing trade and hold overnight but rarely longer.

That means almost all my capital gains are short term.

Long-term gains are usually taxed less — the rate could be anywhere between 0%–20%.

The government files short-term capital gains as regular income. That means you could pay 10%–37%, depending on your income bracket.

Again, that’s just a rough idea. Consult a pro for assistance with taxes. It’s complex stuff, and they’re trained for that.

Anyway, I guess if you want to pay less in taxes you could just hold your positions for more than a year.

That doesn’t work for me. The stocks I play are volatile. I have no idea what they’ll do in the next few minutes. Some of these companies could be gone in a year. And I’m OK with paying taxes. Get used to it.

Years of studying and experience are what help me to profit off of these sketchy stocks.* Paying higher taxes seems like a minimal risk compared to penny stock volatility. Need help surviving volatile markets? Check out my no-cost “Volatility Survival Guide.” Day trading is no joke — prepare for the wild ride.

We’ve just scratched the surface on short-term capital gains and taxes. Let’s dive into more specifics.

Short-Term Capital Gain Tax Rates

tax rates short term capital gains
© Millionaire Media, LLC

As I said before, you can expect to pay anywhere from 10%–37% in taxes. But know that these numbers can change yearly. Stay up to date on tax legislation.

State Taxes on Short-Term Capital Gains

Post image

Get my weekly watchlist, free

Sign up to jump start your trading education!

Up until now, we’ve been discussing federal taxes. Your state government may also want a piece of the pie.

Tax rates vary by state. Make sure to research the rules for where you live. Making a mistake on your taxes can be annoying — and costly.

All this can be confusing, I know. If you need help, contact a professional to walk you through the process.

Special Rates and Exceptions

I have good news and bad news … I’ll give you the bad news first.

If you’re killing it in the stock market and making boatloads of cash, you might need to pay extra taxes.

The net investment income tax, or NIIT, can apply if you exceed the income level for your bracket. It’s just an extra 3.8%, but it’s important to know if you qualify.

The good news is that some U.S. states don’t tax capital gains.

If you live in one of those areas you’ll only have to pay the federal capital gains tax. That might be something to think about if you’re looking to move.

See how education can help you navigate the financial industry? Keep reading to learn more.

supernova placement

How Are Short-Term Capital Gains Calculated?

You’re only taxed on realized profit.

That means until you sell your position, you don’t pay any taxes on it.

Once you sell a stock for more than you bought it — including commission — the government can tax the profit.

And withholding taxable income is illegal, so listen up…

How much you’re taxed depends on a few different factors.

First of all, what kind of asset are you selling? We’ll stick to stocks for this post.

Then the government wants to know how you’re filing — single, married, head of the household.

No, Uncle Sam doesn’t want to know if you’re available. The government taxes people differently based on dependents and other factors.

It also matters which tax bracket you’re in. Your total income decides your bracket.

I could post a table to help you figure it out, but that’s good research for you to do. Plus, the government can change the brackets annually. There are lots of tax calculators out there. Do your research to find an accurate one for the year in which you’re filing.

How to File for Short-Term Capital Gains

how to file short term capital gains
© Millionaire Media, LLC

For the most up-to-date information, visit the IRS website. And again, if you have any questions, find a licensed professional in your area.

The IRS is specific to U.S. taxes. If you live in a different country, you’ll file elsewhere.

I can’t stress enough how important it is to understand this aspect of the stock market. It’s essential to build your knowledge account before you think about your trading and bank accounts.

Making money from buying and selling stocks won’t mean much if the IRS shows up at your door. That’s a rookie move.

Short-Term Losses

“But Tim, I don’t have any short-term capital gains.”

OK, let’s say your trading isn’t going so well and you’ve been losing money.

Most traders lose, so it’s not much of a stretch…

You can potentially deduct the money you lose in the market from the rest of your income. That means you could potentially pay less in taxes.

According to the IRS website, traders can deduct up to $3,000 in losses. And if you lose more than that, you may be able to deduct further losses from next year’s income.*

There are exceptions to this. Wash sales can eliminate the tax loss incentive.

A wash sale is when someone sells an underperforming position for a loss. Then they buy a similar stock at a lower price. The rule tries to prevent tax-loss selling.

Speak to a professional to understand whether you can deduct your trading losses from your taxes and how much you can deduct.

Taking too many losses lately? Time to slow it down and study harder. Get into my 30-Day Bootcamp to help you build a great trading foundation day by day.

Frequently Asked Questions About Short-Term Capital Gains

Of course you have more questions about short-term capital gains. I’ll do my best to answer…

Do Investors Who Earn Money From IRAs Have To Pay a Short-Term Capital Gains Tax?

This is a better question for a tax pro. From my understanding, some IRAs aren’t taxed until you start taking the money out. But once you cash in, the government can tax your realized gains as regular income. But I’d ask a licensed accountant for more info.

Are Dividends Considered Capital Gains?

The government classifies dividends as capital gains. You’ll have to pay taxes on them when it comes time to file.

When Are Short-Term Capital Gain Taxes Due?

This varies from year to year and where you live. Typically, April 15 is Tax Day and the deadline for filing and paying your taxes. But that date can change. For example, the U.S. government pushed the federal filing date for 2020 taxes to May 17, 2021, due to the pandemic. Dates to file state taxes differ based on location. Do your research to find out when to file.

Short-Term Capital Gains: The Bottom Line

tim sykes
© Millionaire Media, LLC

If you plan to make money in the stock market, this is something you must know.

Sure, taxes are a boring topic, and no one gets excited about paying them. But this is a reality of the industry and life.

There are rules you have to follow no matter what you do. There will always be taxes no matter how you make money.

But jumping on your education early can lead to a clearer path in the future. Just by reading this post, you’ve laid the tracks for future success. But it’s not over just yet.

Being successful as a day trader takes a lot of hard work and experience. If you think you have what it takes, apply to my Trading Challenge.

I don’t accept everybody. If you’re just looking for hot picks, this isn’t the place for you. All my millionaire students studied for months and years to get where they are today.**

watchlist banner

Get the right attitude and start studying. Education is your biggest asset whether you’re learning about short-term capital gains or your go-to patterns. Study up!

Have you had to file for capital gains tax? Is this your first introduction? Comment below, I love to hear from all my readers!


*Note: This is in no way legal or financial advice. Always consult a licensed professional in your state or jurisdiction before making tax or legal decisions.

**Please note that these kinds of trading results are not typical. Most traders lose money. It takes years of dedication, hard work, and discipline to learn how to trade. Individual results will vary. Trading is inherently risky. Before making any trades, remember to do your due diligence and never risk more than you can afford to lose.

How much has this post helped you?

Leave a reply

Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”