Short-term capital gain

A short-term capital gain is the profit on the sale of a capital asset held for one year or less. The holding period begins the day after acquisition and ends on the sale date. Short-term gains are taxed at ordinary income rates, which for senior tech employees is typically 32% or 35% federal, plus state tax and the 3.8% Net Investment Income Tax. Short-term losses offset short-term gains first, then other gains, before offsetting up to $3,000 of ordinary income.

Example: an employee exercises NSOs and sells the shares four months later for $40,000 more than FMV at exercise. The $40,000 is short-term capital gain. A California resident in the 35% federal bracket pays 35% federal plus 10.23% state plus 3.8% NIIT, for a combined rate near 49%, producing a $20,000 tax bill.

Common mistake: selling RSU or NSO shares just inside the one-year window to capture the long-term rate. The holding period runs from the day after vest or exercise. An off-by-one error costs the difference between 35% and 20%, plus state.

Short-term capital gains matter at every sale inside 12 months, at harvest timing, and at planning for post-exercise liquidity.