California taxes long-term capital gains at the same rate as ordinary income
Unlike the federal government, which applies a lower tax rate to long-term capital gains (15% or 20% for most people), California treats them as regular income. This means your long-term capital gains are taxed using California's ordinary income tax brackets, which range from 1% to 13.3% depending on how much you earn. If you sell an investment you have held for more than one year and make a profit, that profit gets added to your other income for the year and taxed at your marginal rate.
This matters because it can significantly increase your tax bill compared to what you would owe federally. A person in California's top bracket pays 13.3% state tax on capital gains, while someone in the same federal bracket pays only 20% federally. The combination means California residents often pay more total tax on investment profits than residents of states with no income tax or lower capital gains rates.
Key Takeaways
- California applies its regular income tax rates (1% to 13.3%) to long-term capital gains, not a separate lower rate.
- Long-term means you held the investment for more than one year; gains on assets held one year or less are taxed as short-term capital gains at your ordinary income rate.
- Your capital gain is added to your other income for the year, which can push you into a higher tax bracket.
- Federal tax on long-term capital gains is lower than California state tax, so your total tax burden on investment profits is higher than the federal rate alone.
How California's tax brackets work with capital gains
California's income tax is progressive, meaning the rate increases as your income rises. The brackets for the 2024 tax year start at 1% for the lowest earners and reach 13.3% for those earning over $680,000 (the exact threshold changes yearly). When you add a capital gain to your income, it stacks on top of your other earnings for the year.
For example, if you earn $100,000 in salary and sell stock for a $50,000 gain, California taxes you as if you earned $150,000 that year. This can push you into a higher bracket than you would have been in without the gain. The higher bracket then applies to the capital gain itself, making the effective tax rate on your investment profit higher than it would be if you had earned it in a year with lower income.
The difference between long-term and short-term capital gains in California
California does not distinguish between long-term and short-term capital gains for tax purposes—both are taxed as ordinary income. However, the federal government does make this distinction, and it matters for your total tax bill. Long-term gains (assets held over one year) get the lower federal rate; short-term gains (assets held one year or less) are taxed at your ordinary federal rate, which is higher.
This means a short-term gain in California is taxed at your ordinary state rate plus your ordinary federal rate, while a long-term gain is taxed at your ordinary state rate plus the lower federal long-term rate. The federal difference is significant enough that holding an investment past the one-year mark usually saves you money, even though California itself does not reward you for doing so.
How to calculate your California capital gains tax
Start by finding your total taxable income for the year, including salary, interest, dividends, and any capital gains. Add your capital gain to that total. Then look up the California tax rate for that combined amount using the current year's tax tables (available on the Franchise Tax Board website). Multiply your capital gain by that rate to find your California state tax on the gain.
You will also owe federal tax on the same gain. If it is a long-term gain, use the federal long-term capital gains rate (0%, 15%, or 20% depending on your income level). If it is short-term, use your ordinary federal income tax bracket. Add the state and federal amounts together to find your total capital gains tax.
Many people use tax software or work with a tax professional to handle this calculation, especially if they have multiple gains or losses in the same year. California allows you to offset gains with losses (called tax-loss harvesting), which can reduce your taxable gain.
Capital gains and California's net investment income tax
In addition to ordinary income tax, California residents with high incomes may owe an additional 1% tax on net investment income. This applies to single filers earning over $250,000 and married couples filing jointly earning over $500,000. Net investment income includes capital gains, dividends, interest, and rental income.
This extra 1% is separate from the regular income tax rate and applies on top of it. So a high-income California resident in the 13.3% bracket who also owes the 1% net investment income tax pays an effective state rate of 14.3% on capital gains. This makes California one of the highest-tax states for investment income.
Why California does not offer preferential capital gains rates
Many states and the federal government offer lower tax rates on long-term capital gains to encourage investment and economic growth. California's legislature has debated this approach but has not adopted it. The state treats capital gains as income because it needs revenue for schools, infrastructure, and services, and capital gains are a significant source of tax revenue, especially from high-income earners and technology workers in Silicon Valley.
Proposals to create a preferential capital gains rate in California have been introduced but have not passed. The state's current approach means that investment income is taxed more heavily in California than in many other states, which is one reason some high-net-worth individuals move to states with no income tax or lower capital gains rates.
Planning strategies for California capital gains
Because California taxes capital gains as ordinary income, timing when you realize gains can affect your tax bill. If you have a year with lower income, selling investments in that year means the gain is taxed at a lower rate. Conversely, if you expect higher income in the coming year, you might sell investments now to lock in a lower rate.
Tax-loss harvesting is another strategy: selling investments at a loss to offset gains from other investments. California allows you to deduct up to $3,000 in net capital losses against ordinary income in a single year, with any excess carried forward to future years. This can reduce your taxable gain and lower your state tax bill.
Holding investments for more than one year before selling them saves you federal tax (by may have access to for the lower long-term rate), even though California does not reward you for the wait. Over time, this federal savings can be substantial.
Frequently Asked Questions
Do I owe California tax on capital gains from stocks I sold?
Yes. If you sold stock at a profit, that profit is taxable income in California, regardless of how long you held it. You report it on your California tax return, and it is taxed at your ordinary income rate. If you also owe federal tax on the gain, you pay both.
What if I sold an investment at a loss?
Capital losses can offset capital gains. If you have more losses than gains in a year, you can deduct up to $3,000 of the net loss against your ordinary income. Any loss beyond that carries forward to future years. This can reduce your taxable income and your California tax bill.
Does California tax gains on real estate the same way as stocks?
Yes. Whether the gain comes from selling a rental property, investment land, or stock, California taxes it as ordinary income. Real estate gains may also trigger federal depreciation recapture tax, which is separate. Consult a tax professional if you are selling investment property.
Can I avoid California capital gains tax by moving to another state?
Not when ready. California taxes residents on income earned while they live in the state. If you move, you must establish residency in the new state and may need to file a part-year return in California. The state also has rules about when you are considered to have left, so timing matters.
Is there a way to reduce my capital gains tax in California?
You can offset gains with losses, donate appreciated securities to charity (which avoids the gain entirely), or time the sale of investments to years when your income is lower. A tax professional can review your situation and suggest strategies that fit your circumstances.