Short-term capital gains apply to assets held for 12 months or less before selling, taxed as ordinary income at federal rates of 10-37% depending on your total taxable income bracket. This is the same tax treatment as your salary or wages and significantly higher than long-term capital gains rates (0-20%). Active traders who frequently buy and sell crypto pay short-term rates on most profits, which can dramatically reduce net returns. Timing sells to exceed the one-year holding period can save substantial taxes.
Example:
You're in the 32% tax bracket and make $50,000 trading crypto with average holding periods of 3-6 months. These gains qualify as short-term, so you owe $16,000 in federal taxes (32%). If you had held the same positions for over 12 months, your long-term capital gains rate would be 15%, owing only $7,500 (saving $8,500). This is why buy-and-hold strategies often outperform active trading after taxes, even with similar pre-tax returns.