Capital gains tax is both federal and state, and you pay both

When you sell an investment for a profit, you owe capital gains tax to the federal government and, in most cases, to your state as well. The federal rate is set by Congress and applies everywhere. Your state rate depends on where you live — some states have no capital gains tax at all, while others tax gains at rates as high as 13 percent. You calculate and report both on separate tax forms, but they work independently: a lower federal rate does not reduce what you owe your state.

The total tax you owe is the sum of both. If you sell stock for a $5,000 gain and owe 15 percent federal plus 5 percent state, you pay $750 to the IRS and $250 to your state — $1,000 total. Neither one reduces the other.

Key Takeaways

  • The federal government taxes capital gains at rates of 0, 15, or 20 percent depending on your income, and this applies to everyone regardless of state.
  • Most states also tax capital gains as ordinary income, but nine states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire) have no state capital gains tax.
  • Your total tax bill is the sum of federal and state taxes — they do not offset each other.
  • Long-term gains (assets held over one year) are taxed at lower federal rates than short-term gains, but state treatment varies by state.

How federal capital gains tax works

The federal government taxes capital gains through the Internal Revenue Service (IRS) using three tax brackets: 0 percent, 15 percent, and 20 percent. Which bracket you fall into depends on your total taxable income for the year, not on the size of the gain itself. These rates explore only to long-term capital gains — profits from assets you held for more than one year. Short-term gains (held one year or less) are taxed as ordinary income at your regular tax rate, which can be as high as 37 percent.

You report federal capital gains on Schedule D (Form 1040) when you file your annual tax return. The IRS requires you to list each sale separately, including the purchase price, sale price, and the date you bought and sold the asset. If you sold stocks, real estate, or other investments during the year, your broker or the person who sold you the asset will send you a Form 1099-B or similar document showing the transaction details. The total from Schedule D carries to your Form 1040, where it combines with your other income to determine your final tax bill.

How state capital gains tax works

Most states treat capital gains as income and tax them at the same rate they tax wages and salary. This means if your state income tax rate is 5 percent, you pay 5 percent on capital gains as well. A few states have created separate, lower capital gains tax rates: California taxes long-term gains at 1 percent (on top of ordinary income tax), and Washington state recently introduced a 7 percent tax on long-term gains over $250,000. You report state capital gains on your state income tax return, usually on a form that mirrors the federal Schedule D.

Nine states have no capital gains tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington (despite the new long-term gains tax), Wyoming, and New Hampshire. If you live in one of these states, you owe federal capital gains tax but nothing to your state. If you moved during the year you sold an asset, you may owe tax to both your old state and your new state, depending on when the sale occurred and each state's rules — this is a situation where a tax professional's guidance is worth the cost.

Long-term versus short-term gains and tax rates

The federal government rewards patience: if you hold an asset for more than one year before selling, your gain qualifies as long-term and receives preferential tax rates (0, 15, or 20 percent). If you sell within one year, it is short-term and taxed as ordinary income at your marginal rate. Most states do not make this distinction — they tax both long-term and short-term gains at the same rate. California and Washington are exceptions: both offer lower rates specifically for long-term gains.

The holding period is measured from the date you purchased the asset to the date you sold it. If you bought stock on June 15 and sold it on June 14 the following year, it is short-term by one day. Brokers and investment platforms usually track this automatically and label transactions as long-term or short-term on your year-end statements. This distinction matters significantly: a short-term gain on $5,000 could be taxed at 37 percent federally instead of 20 percent, a difference of $850 before state tax.

What happens if you live in a state with no capital gains tax

If you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, or New Hampshire, you still owe federal capital gains tax. You do not owe your state anything on the gain itself. However, you must still report the sale on your federal return. Some of these states have other taxes (sales tax, property tax, or business taxes) that may affect your overall tax picture, but capital gains specifically are not taxed at the state level.

If you moved to one of these states after selling an asset, the timing matters. Generally, you owe tax to the state where you lived when you sold the asset. If you sold stock while living in California and then moved to Texas, you owe California tax on that gain. If you sold it after moving to Texas, you owe nothing to California. Your state of residence is usually determined by where you maintained your primary home and spent most of the year.

Reporting capital gains on your tax return

You report federal capital gains on Schedule D (Form 1040), which you file with your annual federal tax return. The form asks for the description of the property sold, the date acquired, the date sold, the sales price, the cost basis (what you paid for it), and the gain or loss. If you sold multiple assets, you list each one separately. The total from Schedule D carries to Form 1040, where it combines with your other income to determine your tax bracket and your final tax bill.

For your state return, you typically report capital gains on a similar schedule or directly on the state income tax form itself. Some states require you to attach a copy of your federal Schedule D. The exact form varies by state — your state's department of revenue website lists the required forms and instructions. If you use tax software, it usually handles both federal and state reporting automatically once you enter the transaction details.

How to calculate what you owe

Start with the gain: sale price minus cost basis (what you paid, plus any improvements or fees). That number is your capital gain. Multiply it by your federal tax rate (0, 15, or 20 percent for long-term gains, or your ordinary income rate for short-term gains). Then multiply the same gain by your state tax rate. Add the two amounts together. That is your total capital gains tax bill.

Example: You bought stock for $10,000 and sold it for $15,000 after holding it for two years. Your gain is $5,000. If you are in the 15 percent federal bracket and your state taxes income at 5 percent, you owe $750 federal (15% × $5,000) plus $250 state (5% × $5,000), for a total of $1,000. If you lived in a no-tax state, you would owe only the $750 federal. If that same gain was short-term and you were in the 37 percent federal bracket, you would owe $1,850 federal plus $250 state — $2,100 total.

Frequently Asked Questions

Do I owe capital gains tax if I sold my home?

Most homeowners do not. The federal government excludes up to $250,000 in gains ($500,000 if married filing jointly) if you lived in the home as your primary residence for at least two of the last five years. Most states follow the same rule. If your gain exceeds the exclusion, you owe tax on the excess. Consult a tax professional if your home sale resulted in a very large gain.

What if I have a capital loss instead of a gain?

You can use capital losses to offset capital gains, reducing your tax bill. If losses exceed gains, you can deduct up to $3,000 of the net loss against ordinary income in that year. Any remaining loss carries forward to future years. Report losses on Schedule D just as you would gains.

Do I have to pay capital gains tax the year I sell, or can I pay it later?

You report and pay capital gains tax when you file your annual return for the year the sale occurred. If you owe a large amount, you may need to make estimated tax payments during the year to avoid penalties. Your tax software or a tax professional can tell you whether you need to make quarterly payments.

If I moved states, which state gets the tax?

The state where you lived when you sold the asset. If you sold stock while a resident of New York and moved to Florida the next month, you owe New York tax on that gain. Your state of residence is based on where you maintained your primary home and spent the majority of the year.

Are cryptocurrency gains taxed the same way?

Yes. The IRS treats cryptocurrency as property, not currency. When you sell it for a profit, that gain is a capital gain subject to federal tax at the same rates as stock or real estate. Your state applies its capital gains or income tax the same way. You report it on Schedule D.