Capital gains tax is very important for business owners, investors, and homeowners. Here, we are sharing a guide on California’s capital gains tax because California is known as the state with the highest tax rate in the United States. Here, we will also understand how capital gains are taxed in California and how it can help you minimize liabilities and maximize returns.
Other than California capital gains tax, this guide also explains exemptions and strategies to reduce your tax burden. If you find any difficulty with capital gains tax, then we also offer our tax planning and consulting services to help you.
We will talk about these services later in the blog. First, talk about the Capital gains tax.
What is Capital gains tax?
Capital gains tax is collected on the profit earned from selling an asset that has increased in value. These assets can include:
- Stocks and bonds
- Real estate
- Businesses
- Collectibles (Art, jewelry, etc.)
Capital gains are divided into two categories:
- Short-term Capital gains – These are the profits from assets held for one year or less. These gains are taxed as ordinary income.
- Long-term capital gains – These are the profits from assets held for more than one year. These gains typically receive lower tax rates.
How Does California Tax Capital Gain?
In other states of the US, short-term and long-term capital gains are different, but in California, both gains are taxed as regular income. This means you must pay capital gain per California’s progressive income tax rates. The tax ranges from 1% to 13.3% (the highest in the US).
2024 California Capital Gains Tax Rates
| Tax Bracket (Single Filers) | Tax Rate |
| $0 – $10,412 | 1% |
| $10,413 – $24,684 | 2% |
| $24,685 – $38,959 | 4% |
| $38,960 – $54,081 | 6% |
| $54,082 – $68,350 | 8% |
| $68,351 – $349,137 | 9.3% |
| $349,138 – $418,961 | 10.3% |
| $418,962 – $698,271 | 11.3% |
| $698,272+ | 12.3% |
| $1,000,000+ | 13.3% |
Note: If married couples file jointly, the brackets are approximately double.
Federal Capital Gains Tax Rates
In addition to California taxes, you will also owe federal capital gains tax:
- Short-term Gains: Taxed as ordinary income (10% – 37%)
- Long-term Gains: 0%, 15%, or 20% (depending on income)
If you are a high-income earner, then you may also face an additional 3.8% Net Investment Income Tax (NIIT).
Key Exemptions & Deductions
1. Primary Residence Exclusion
If you sell your primary home, you may exclude up to $250,000 (if you are single filers) and $500,000 (if married filing jointly).
Requirements:
- If you owned and lived in the home for 2 of the last 5 years.
- Not used the exclusion in the past 2 years.
2. 1031 Exchange (Like-Kind Exchange)
A 1031 exchange allows real estate investors to defer capital gains tax by reinvesting proceeds into a similar property.
Key Rules:
- You must identify a replacement property within 45 days.
- You must complete the exchange within 180 days.
- It only applies to investment/business properties (not personal residences).
3. Opportunity Zone Investments
Investing capital gains in Qualified Opportunity Zones (QOZs) can defer and reduce taxes:
- Deferral: Taxes deferred until 2026 (or sale of the investment)
- Reduction: 10% – 15% reduction in deferred gains
- Exclusion: Tax-free growth if held for 10+ years
4. Capital Losses Offset Gains
If you have capital losses, then you can use them to offset capital gains. If you have excess losses (up to $3,000 per year), they can be deducted from ordinary income.
How to Reduce California Capital Gains Tax
1. Hold Assets Long-Ter
As we know, California does not offer lower rates for long-term gains, but if you hold assets for over a year, it still reduces your federal tax burden.
2. Tax-Loss Harvesting
If you sell underperforming investments, then you offset your gains and lower your taxable income.
3. Gift or Donate Appreciated Assets
- Gifting: If you transfer assets to your family to reduce tax.
- Donating: To avoid capital gains, you must show a charitable deduction.
4. Installment Sales
You can spread gains over multiple years by receiving payments in installments.
5. Move to a No-Tax State Before Selling
California taxes all residents on capital gains. If you establish residency in a no-tax state (e.g., Texas, Florida, Nevada) before selling, you may avoid CA taxes.
Note: If you move to a no-tax state before selling, California’s “exit tax” may apply if you move after selling.
California Capital Gains Tax vs. Other States
| State | Capital Gains Tax Rate |
| California | 1% – 13.3% |
| Texas | 0% |
| Florida | 0% |
| New York | Up to 10.9% |
| Washington | 7% (on high earners) |
California has a top rate of 13.3% Capital Gains Tax Rate, which is the highest in the nation, making tax planning essential.
How Eric M Hunt Can Help
Understanding California’s capital gains tax law is very complex. Normal people may face many challenges, that is why we provide expert tax planning services, including:
✅ Tax minimization strategies
✅ 1031 exchange guidance
✅ Opportunity Zone investments
✅ Residency planning
✅ IRS & FTB audit defense
Contact us today for a free consultation!
FAQ
1. What is capital gains tax in California?
Capital gains tax in California is a tax imposed on profits earned from selling assets such as stocks, real estate, or other investments. California treats capital gains as regular income, subject to federal and state income taxes.
2. How much is capital gains tax in California?
California does not impose a separate tax rate on capital gains. Instead, capital gains are treated as ordinary income and taxed at the state’s standard income tax rates, which range from 1% to 13.3%, depending on your income level. On top of state taxes, federal capital gains tax rates (0%, 15%, or 20%) may also apply.
3. Does California have capital gains tax?
Yes, California taxes capital gains but does not have a separate tax rate for them. Instead, capital gains are included in your taxable income and taxed at California’s standard income tax rates.
4. How can capital gains tax be avoided in California?
Some strategies to reduce or avoid capital gains tax in California include:
- Utilizing the primary residence exclusion (up to $250,000 single / $500,000 married).
- Investing in Opportunity Zones or 1031 exchanges (for real estate).
- Offsetting gains with capital losses.
- Donating appreciated assets to charity.
- Holding investments for more than a year to qualify for lower federal rates.
5. What is the capital gains tax rate in California?
Since California taxes capital gains as ordinary income, the rates range from 1% to 13.3%, based on your income level. Short-term gains (held less than a year) are taxed at the same rate as long-term gains in California, though they may have different federal rates.
6. How does California tax capital gains?
California taxes capital gains by including them in your total taxable income. The state does not distinguish between short-term and long-term gains for its tax rates, though the federal government does.
7. Does California tax capital gains on stocks?
Yes, California taxes capital gains from the sale of stocks. These gains are treated as regular income and taxed at California’s income tax rates (1%–13.3%).
8. Does California tax long-term capital gains?
Yes, California taxes long-term capital gains (assets held for more than one year), but unlike the federal government, it does not offer a preferential rate. Long-term gains are taxed at the same rates as short-term gains in California.
9. Does California tax HSA capital gains?
No, capital gains within a Health Savings Account (HSA) are not taxed in California (or federally) as long as the funds are used for qualified medical expenses. However, California does not conform to federal HSA tax rules, meaning contributions to an HSA are not state tax-deductible.
10. Do I have to pay capital gains tax in California?
If you sell an asset for a profit and are a California resident, you must pay capital gains tax to the federal government and the state of California. Non-residents may also owe California capital gains tax if the sale involves California-based property or business interests.
Conclusion
The California capital gains tax is the highest in the US, which makes strategic planning essential for investors and homeowners. You can significantly reduce your tax liability by leveraging exemptions like the primary residence exclusion, 1031 exchanges, and Opportunity Zones. If you are still facing any issues, then you can read our guide on California capital gains tax.
For personalized advice, we (Eric M Hunt, CPA) offer expert tax planning to help you keep more of your profits.
Need help with capital gains tax planning? Contact us today!
