Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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What are the capital gains tax rates for short-term gains?

Zero percent
15%
Ordinary income rates
20%

The correct answer is: Ordinary income rates

The capital gains tax rates for short-term gains are aligned with ordinary income rates because short-term capital gains are typically generated from assets held for one year or less. This means that the profit from the sale of such assets is taxed as regular income, subject to the same tax brackets that apply to wages or salary. The ordinary income tax rates are progressive, impacting individuals based on their total taxable income. Therefore, someone with a higher income may pay a higher tax percentage on their short-term capital gains compared to someone with a lower income. This structure is in contrast to long-term capital gains, which often have reduced tax rates that can vary (such as 0%, 15%, or 20%) depending on the taxpayer's overall income level. Understanding that short-term gains are taxed as ordinary income is crucial for tax planning and investment strategies.