How does short-term capital gain typically differ from ordinary income?

Short-term capital gain and ordinary income are both subject to taxation at the same income tax rates. This means that any short-term gains you realize—the profits made from selling an asset held for one year or less—are taxed as ordinary income. This is crucial for taxpayers to understand because it affects the overall tax liability. Ordinary income includes wages, salaries, bonuses, and interest income, and both types of income fall into the same tax brackets set by the IRS. This results in short-term capital gains being added to your total income and taxed at your marginal tax rate, just like other sources of ordinary income.

Option A can be misleading because while it's true that long-term capital gains are taxed at different rates (lower than ordinary income), short-term capital gains align with ordinary income. Option C is incorrect because short-term capital gains are not exempt from taxation; they are indeed taxable. Option D misrepresents the effect of short-term capital gains on Adjusted Gross Income (AGI), as these gains do not reduce AGI; instead, they increase it by being included in the total income calculation. Understanding this distinction helps taxpayers plan effectively for tax liabilities related to their investments.