======Short-Term Capital Gain======
A Short-Term Capital Gain is the profit realized from the sale of a [[capital asset]], such as a stock, bond, or piece of real estate, that has been held for a relatively brief period. In the United States, the magic number is one year; if you sell an asset for a profit after holding it for one year or less, you’ve bagged yourself a short-term capital gain. This type of gain is treated very differently by the tax authorities compared to its more patient cousin, the [[long-term capital gain]]. The crucial distinction isn't the size of the profit but the duration of the investment—the [[holding period]]. For investors, understanding this difference isn't just academic; it has a direct and significant impact on your after-tax returns. Think of it as the government's way of rewarding patience and penalizing impatience.
===== The Nitty-Gritty: How It Works =====
==== The Clock is Ticking: The Holding Period ====
The concept of a holding period is simple but strict. It's the amount of time you own an asset, starting from the day after you acquire it up to the day you sell it.
  * **The Rule:** If this period is one year or less, your profit is classified as a short-term [[capital gain]].
  * **The Example:** Let's say you buy shares of XYZ Corp on May 10, 2023.
    * If you sell those shares on or before May 10, 2024, any profit is **short-term**.
    * If you sell them on May 11, 2024, or any day after, the profit becomes **long-term**.
Getting the dates wrong by a single day can change the entire tax character of your profit.
==== The Tax Man's Toll ====
Here’s the part that really hits the wallet. Unlike long-term gains, which enjoy preferential, lower tax rates, short-term capital gains are taxed at your [[ordinary income]] rate. This means they are simply added to your other income (like your salary) and taxed at your highest marginal [[tax bracket]].
Let's imagine an investor named Jane who is in the 24% federal tax bracket.
  - **Scenario 1 (Short-Term):** Jane makes a $1,000 profit on a stock she held for 11 months. This gain is taxed at her ordinary income rate of 24%. She owes the tax man $240 ($1,000 x 0.24).
  - **Scenario 2 (Long-Term):** Jane makes the same $1,000 profit on a stock she held for 13 months. This gain is now long-term. The long-term capital gains rate for her income level is likely 15%. She owes the tax man just $150 ($1,000 x 0.15).
By simply holding on for a little over a month longer, Jane saved $90 in taxes. Impatience is expensive!
===== A Value Investor's Perspective =====
==== The Enemy of Great Returns ====
For followers of [[value investing]], actively seeking short-term capital gains is often seen as a fool's errand. It's the hallmark of //speculation//, not //investing//. The goal of a value investor is to buy a piece of a wonderful business at a fair price and hold it for many years, allowing the company's value to grow and compound. This long-term mindset naturally avoids the punitive taxes associated with short-term trading.
As the legendary [[Warren Buffett]] famously said, "The stock market is a device for transferring money from the impatient to the patient." Chasing quick profits often leads to:
  * **Higher Taxes:** As we've seen, this is the most direct and painful cost.
  * **More [[Brokerage Fees]]:** Frequent trading racks up transaction costs, eating away at your returns.
  * **Flawed Mindset:** It encourages you to watch the wiggles of stock prices rather than the performance of the underlying business. This is gambling, not owning.
==== When Are They Acceptable? ====
A value investor doesn't set out to achieve a short-term gain. However, sometimes they happen by accident.
  - **A Mistake Recognized:** You might buy a stock and soon realize you made a significant error in your analysis. Selling quickly to cut your losses (or take a small, unintentional gain) is a prudent move.
  - **A Sudden Windfall:** The company you invested in might receive a [[takeover]] offer at a high premium just a few months after you bought it. In this case, the sale is forced upon you.
In these situations, the short-term gain is a byproduct of a sound decision, not the goal itself.
===== The Bottom Line =====
A short-term capital gain is a quick profit that comes with a high price tag. The tax system is explicitly designed to reward long-term ownership. For investors aiming to build real, sustainable wealth, the lesson is clear: think like a business owner, not a ticket scalper. By focusing on the long-term prospects of your investments, you not only align yourself with the principles of value investing but also with a much friendlier tax code. Patience doesn't just feel virtuous; it pays.