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

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

A profit gain from a limited period of investment is called 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 around the world consider short-term capital gain a regular income and it comes under tax liability.

How does it work?

When anyone realizes a profit from capital assets, which was held for a minimum of one year or less is called Short Term Capital Gain. This profit may come from disposition, transfer, or sales of investment or personal property. 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 a difference between the purchase price of the capital asset and the sales price of the capital asset. As an example, if anyone purchases a property for $150,000 and sells it for $180,000 within a year, then 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.

Only a short term loss can reduce short term capital gain tax. As an example, if anyone gains $30,000 as short-term capital gain and loses $10,000 as short term loss, then 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 to have 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 to the 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 to other properties. With this way of 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 to concentrate 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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