What is Short Term Capital Gain? | Concept, Pros vs Cons

The reason behind every investment is financial gain. For this reason, investors put their money into different capital investments. They do some investments for the long term and some for the short term.

A profit gain from a limited investment period is called a short-term capital gain. This type of investment return is very common in various sectors. This type of capital gain may come from equity or property sale. Many investors earn their livelihood from short-term capital gain. However, most governments worldwide consider short-term capital gain a regular income, which comes under tax liability.

Key Takeaways

  1. Short-term capital gain refers to profits earned from the sale of assets held for less than a year.
  2. This type of gain is subject to higher tax rates than long-term capital gains and can be impacted by market volatility.
  3. Short-term capital gains can be generated through stocks, bonds, and mutual funds.
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How does it work?

When anyone realizes a profit from capital assets held for a minimum of one year or less is called Short Term Capital Gain. This profit may come from disposition, transfer, investment, or personal property sales. In most parts of the world, it is considered taxable income, and the gainer needs to pay 10% to 37% tax on the profit.

The profit from short-term capital gain is the difference between the capital asset’s purchase price and the capital asset’s sales price. For example, if anyone purchases a property for $150,000 and sells it for $180,000 within a year, the short-term capital gain will be $30,000. This $30,000 will be considered as an income of the person. According to the annual income, the person has to pay tax on this $30,000 profit.

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Only a short-term loss can reduce short-term capital gain tax. For example, if anyone gains $30,000 as a short-term capital gain and loses $10,000 as a short-term loss, the taxable amount will be $20,000. The taxable amount and the tax rate may vary from country to country and the taxation law of the land.

Advantages of Short-Term Capital Gain

Many investors prefer short-term capital gain and utilize it as a part of their financial income. A short-term capital gain gives the investor financial freedom. It allows the investor to channel the money into different pools for investment. The investor can utilize finance more effectively and micro-manage the fund regularly. It presents a golden opportunity for small investors who lack large funds for financial operations. For example, a small broker can buy and sell property throughout a financial year and reinvest that amount into other properties. With this business, the broker can benefit from short-term capital gain.

Disadvantages of Short-Term Capital Gain

The primary disadvantage of short-term capital gain is that this activity encourages market volatility. In the stock market, it encourages many people to do day trading. For this reason, most governments discourage traders from concentrating on short-term capital gain and impose a heavy tax on this activity. As a result, the investor may have to pay 37% of the tax on the short-term capital gain.

References
  1. https://www.sciencedirect.com/science/article/pii/S0378426698000727
  2. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/taxlr25&section=26
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