Short Term Capital Gains Tax – Sell Quickly and Pay!

How The Rates Vary With Time

August 26, 2004
By Niles Brohey

Capital gains tax rates are determined by several factors. Although information such as your personal income, and what the asset being sold is effect the rate of tax, the way these factors effect the rate is determined by how long you have possessed the asset in question. Short term capital gains taxes apply to assets you have possessed for less than a certain amount of time.

In the United States and most western nations assets are considered short term if they have been held for less than one year. Gains made from selling these assets are subject to short term capital gains tax rates. At present the short term capital gains tax rate is the same as your personal income rate.

For assets held less than one year the rate of capital gains tax is the same as your personal income tax rate, so if you sell assets which you have possessed for less than one year you will be taxed at a relatively high rate. To put things in perspective the rate of tax charged on assets held one year or longer can be up to 25% less.

Of course in many situations selling a short term asset is highly desirable, in practices such as real estate flipping it is essential and despite the high tax can produce an impressive return. Other situations where early selling is desirable include when an asset is losing value or money at a high rate. In this case the money saved by waiting and paying a low rate of tax is lost in depreciation of the assets value.

The general trend in capital gains tax rates is towards lower taxes, however this isn't generally applicable to short term capital gains tax rates. As they are the same as income tax rates they tend to decrease slowly, if at all. For example long term capital gains tax rates dropped by 5% in 2003, the drop in the short term rate was much less definite, although a small drop did occur.