Short Term Capital Gains
Before you can understand short term capital gains, it is first important to have an overview about what capital gains actually are so that you will know the advantages and disadvantages of short term capital gain. Capital gains are basically just the increase in value of the capital asset you have acquired. But you will neither experience these gains nor pay any taxes until your capital assets are sold. There are two types of capital gain, namely the short term capital gain and the long term capital gain.
The main difference between the short term and long term is just the length of time you hold your capital asset. Short term capital gains are profits you derive from the assets that you hold for less than 12 months. Meanwhile, long term capital gains are the profits you derive from an asset you hold for more than one year. You should note that there is a significant amount of difference in the tax you have to pay in short term capital gain and long term capital gain: you will pay a higher rate of taxes in a short term capital gain.
Currently, the tax rate you have to pay for long term capital gains can range from 5% to 15% while the capital gain tax rate you have to pay for short term capital gains can go as high as 35%. Clearly, the law is biased towards long term capital gain but it is not without reason. This is because holding a capital for a long period of time whether it is real estate or tax will encourage entrepreneurship and thus improve the economy.
However, the rules on how you should calculate your capital gain tax is the same for both the short term and the long term. You just have to deduct the cost of selling from the sale amount of your property. Then you should also deduct the adjusted tax, which will give you the total taxable capital gain/loss. If you experienced capital loss at the end of the year, you can deduct a maximum of $3000 from your regular amount.
If you had experienced capital gain in just one year, though, and then you decide to liquidate, you should be prepared to part with a large percentage of your profits. This is because short term capital gains will be considered as regular income rather than as an investment when you sell your capital asset immediately. As you can see, the laws on short term capital gains discourage early liquidation. So it is highly recommended that you hold your capital asset for a year at the very least.
Of course, you will still have to pay 5% or 15% in taxes depending on your income tax bracket, but this tax rate is definitely lower than what you have to pay in short term capital gains tax. So clearly, long term capital gains are better because they will let you avoid paying an astronomical amount of taxes, which will let you enjoy higher profits on your endeavor.