California taxes investment profits at your ordinary income rate, plus a 3.876% net investment income tax if you earn over a threshold

California does not have a separate capital gains tax rate. When you sell an investment at a profit—a stock, rental property, or business stake—the profit is taxed as ordinary income using California's regular tax brackets. Those brackets range from 1% to 13.3% depending on your total income for the year. On top of that, if your net investment income exceeds $250,000 (single filer) or $500,000 (married filing jointly), you owe an additional 3.876% net investment income tax.

This means your capital gains tax bill depends entirely on your total income bracket. A person in the 9.3% bracket pays 9.3% on capital gains. A person in the 13.3% bracket pays 13.3%, plus the 3.876% surtax if they cross the investment income threshold. The federal government also taxes capital gains separately, so your total tax on an investment profit includes both California and federal tax.

Key Takeaways

  • California taxes capital gains as ordinary income using your regular tax bracket, which ranges from 1% to 13.3% depending on how much you earned that year.
  • If your net investment income exceeds $250,000 (single) or $500,000 (married filing jointly), you pay an additional 3.876% surtax on the amount above that threshold.
  • Your total capital gains tax includes both the California state tax and the federal capital gains tax, which are calculated separately.
  • Long-term capital gains (assets held over one year) and short-term gains (held one year or less) are both taxed at your ordinary income rate in California, unlike federal tax which treats them differently.

How California's tax brackets work with capital gains

California's income tax brackets are progressive, meaning the rate increases as your income rises. In the 2024 tax year, the brackets start at 1% for income under $10,099 (single filer) and climb to 13.3% for income over $680,063. When you add capital gains to your income, they push you into a higher bracket if you cross a threshold.

For example, if you are single and earned $80,000 in wages, you are in the 9.3% bracket. If you then sell an investment for a $50,000 profit, your total income becomes $130,000. That $50,000 gain is taxed at the marginal rate—the rate that applies to your highest dollars of income. In this case, some of that gain may be taxed at 9.3% and some at a higher rate, depending on exactly where the bracket lines fall.

This is different from the federal system, where long-term capital gains (assets held more than one year) get preferential rates of 0%, 15%, or 20%. California does not offer that break—all capital gains, whether long-term or short-term, are taxed as ordinary income.

The 3.876% net investment income surtax

California added a 3.876% tax on net investment income in 2013. This is a separate tax that applies only if your net investment income exceeds $250,000 in a year (or $500,000 if you are married filing jointly). The surtax applies only to the income above that threshold.

Net investment income includes capital gains, dividends, interest, and rental income. If you sell a stock for a $100,000 gain and receive $50,000 in dividends, your net investment income is $150,000. If you are single and that is your only income, you do not owe the surtax because you are under $250,000. If you are single and earned $200,000 in wages plus the $150,000 in investment income, your total is $350,000, and you owe the 3.876% surtax on $100,000 (the amount above $250,000).

The threshold amounts are adjusted slightly each year for inflation, so check the current year's Franchise Tax Board guidance if you are close to the limit.

Long-term versus short-term capital gains in California

The federal government taxes long-term capital gains (assets held over one year) at lower rates than short-term gains. California does not make this distinction. Both are taxed as ordinary income at your marginal rate.

This means holding an investment for more than a year saves you federal tax but not California tax. If you are in California's 13.3% bracket and sell a stock you held for two years, you pay 13.3% California tax on the gain. You would pay 15% or 20% federal tax depending on your income, but California's rate does not change based on how long you held it.

What counts as a capital gain in California

A capital gain is the profit you make when you sell an asset for more than you paid for it. Common examples include stocks, bonds, mutual funds, real estate, and business interests. The gain is the sale price minus what you paid, minus any selling costs like broker fees or real estate commissions.

If you bought a house for $400,000 and sold it for $550,000, your capital gain is $150,000 (minus any selling costs). If you bought 100 shares of stock at $50 per share ($5,000 total) and sold them at $75 per share ($7,500 total), your gain is $2,500.

Some gains are excluded from taxation. The main one is the primary residence exclusion: if you sell your main home, you can exclude up to $250,000 of the gain (or $500,000 if married filing jointly) if you meet certain conditions—you must have owned and lived in the home for at least two of the last five years.

How to report capital gains on your California tax return

You report capital gains on Schedule D (Form 1040) for federal tax and on California Form 540 Schedule D for state tax. Your broker or investment company sends you a Form 1099-B or 1099-DIV listing all your sales and dividends for the year. You use this to fill out Schedule D, which calculates your total long-term and short-term gains.

California requires you to report the same gains on your state return. The state uses your federal taxable income as a starting point, so if you report a gain on your federal return, it automatically flows to your state return unless you have a specific California adjustment.

If you have significant capital gains, consider working with a tax professional or using tax software that handles both federal and state returns. The rules around basis (what you paid), holding periods, and adjustments can be complex, especially if you have inherited assets or made gifts.

Frequently Asked Questions

Do I owe California tax on gains from selling a rental property?

Yes. Rental property sales are treated the same as any other capital gain—taxed as ordinary income at your marginal rate, plus the 3.876% surtax if you exceed the investment income threshold. You may be able to deduct depreciation recapture at a higher rate, but the initial gain is taxed as ordinary income.

What if I lost money on an investment?

Capital losses can offset capital gains. If you sold one stock for a $5,000 gain and another for a $3,000 loss, your net gain is $2,000 and you owe tax on $2,000. If losses exceed gains in a year, you can deduct up to $3,000 of the net loss against other income, and carry forward any remaining loss to future years.

Do I owe California tax on gains from out-of-state investments?

Yes. California taxes all income earned by residents, regardless of where the investment is located. If you live in California and sell a stock traded on any exchange, you owe California tax on the gain. If you moved out of California, you generally do not owe California tax on gains after you establish residency elsewhere.

Is there a way to reduce my capital gains tax in California?

You cannot reduce the rate itself, but you can manage when you realize gains. Timing sales across tax years, harvesting losses to offset gains, and holding assets until death (which resets the basis to fair market value) are strategies some investors use. Consult a tax professional about what applies to your situation.