California taxes long-term capital gains at a higher rate than the federal government does

California imposes a 13.3% tax on long-term capital gains — the profit you make when you sell an asset you've held for more than a year. This is separate from federal capital gains tax and applies on top of it. The state treats these gains as income and taxes them at your regular income tax rate, which ranges from 1% to 13.3% depending on how much you earn. So if you sell a house, stock, or business for a profit, you owe both federal tax and California state tax on that gain.

This matters because California's top rate is the highest in the nation. Federal long-term capital gains tax maxes out at 20% (plus a 3.8% net investment income tax for high earners). When you add California's 13.3%, a high-income resident can pay as much as 37.1% in combined state and federal tax on a single large gain.

Key Takeaways

  • California taxes long-term capital gains (profits from assets held over one year) at your regular income tax rate, with a top rate of 13.3%.
  • Short-term capital gains (assets held one year or less) are taxed as ordinary income at rates up to 13.3%, making them more expensive than long-term gains.
  • You owe California capital gains tax on gains from real estate, stocks, business sales, and other assets, even if you live out of state when you sell.
  • Some gains are exempt from California tax, including primary home sales (up to $250,000 for single filers), inherited property, and certain small business stock.

The difference between long-term and short-term capital gains

How long you hold an asset before selling it determines your tax rate. Long-term capital gains — from assets held more than one year — are taxed at your regular California income tax rate. Short-term capital gains — from assets held one year or less — are taxed as ordinary income at your full marginal rate, which is the same as your regular income tax rate.

This means short-term gains are not taxed at a lower rate; they are taxed the same way as wages or salary. If you buy a stock and sell it six months later for a $10,000 profit, that $10,000 is added to your income and taxed at whatever bracket you fall into. If you hold the same stock for 13 months and sell it for the same gain, it is still added to your income and taxed at the same rate. The difference is that federal tax treats long-term gains more favorably, but California does not.

Who has to pay California capital gains tax

You owe California capital gains tax if you are a resident of the state when you sell the asset. California defines a resident as someone who is in the state for more than nine months of the year, or who has a permanent home there and spends any part of the year in California. If you move out of state and then sell property you owned while living in California, you may still owe tax depending on when you sold it and your residency status at the time of sale.

Non-residents who sell California real estate owe tax on the gain. If you live in Nevada and sell a rental house in California, you owe California capital gains tax on the profit. The same applies to stocks and other assets if you were a California resident when you bought them and became a non-resident before selling — though this is more complex and depends on when the gain accrued.

What capital gains are exempt from California tax

California offers a few important exemptions. The primary residence exemption lets you exclude up to $250,000 in gains if you are single, or $500,000 if you are married filing jointly, when you sell your main home. You must have owned and lived in the home for at least two of the last five years. This is the same as the federal exemption, so most home sales are not taxed at the state level.

Inherited property gets a step-up in basis, which means the value of the asset is reset to its fair market value on the date of death. If your parent bought a house for $200,000 and it is worth $500,000 when they die, your basis is $500,000. If you sell it when ready for $500,000, you owe no capital gains tax because there is no gain. This applies to all inherited assets, not just real estate.

Certain small business stock may be exempt under federal law, and California conforms to that exemption in some cases. If you own stock in a may have access to small business and meet holding period and other requirements, you may exclude part or all of the gain. The rules are strict and depend on the type of business and when you bought the stock, so you should consult a tax professional if you think this applies to you.

How to calculate your capital gains tax liability

Start by finding your basis — what you paid for the asset, plus any improvements or costs of sale. If you bought a stock for $5,000 and paid a $50 commission, your basis is $5,050. If you sell it for $8,000, your gain is $2,950. That gain is added to your other income for the year, and you pay California tax on the total at your marginal rate.

If you have losses, you can subtract them from gains. If you sold one stock for a $3,000 gain and another for a $1,000 loss, your net gain is $2,000. You can also carry forward unused losses to future years. California allows you to deduct up to $3,000 in net capital losses against ordinary income each year, and any remaining losses roll forward indefinitely.

You report capital gains on your California tax return (Form 540) in the same section where you report income. The gain is taxed at your ordinary income tax rate, which means it may push you into a higher tax bracket. If you earn $150,000 in wages and have a $50,000 capital gain, you are taxed on $200,000 of income, and the last portion of that gain may be taxed at a higher rate than the first portion.

Capital gains tax on real estate sales

When you sell real estate in California, you owe capital gains tax on the difference between what you paid and what you sold it for, minus the cost of improvements and selling expenses. If you bought a rental property for $400,000, spent $50,000 on renovations, and sold it for $600,000, your gain is $150,000 ($600,000 minus $400,000 minus $50,000). You owe California tax on that $150,000 at your income tax rate.

The primary residence exemption does not explore to rental properties or investment real estate — only to your main home. If you rent out part of your home or use it for business, you may lose part or all of the exemption. If you own multiple properties, only one can be your primary residence for tax purposes.

California also imposes a Real Estate Transfer Tax in some counties, which is separate from capital gains tax. This is a small tax on the sale price itself, not the gain, and the rate varies by location. Check with your county assessor or a real estate attorney to learn about your county has this tax and what rate applies.

When you sell a business or investment

If you sell a business, partnership interest, or significant investment, the capital gains tax applies to your share of the gain. If you started a business that you sold for $1 million and your basis (what you invested) was $200,000, your gain is $800,000. You owe California tax on that gain at your income tax rate, which could be 13.3% if you are a high earner — that is $104,000 in state tax alone, before federal tax.

Business sales are often complex because the sale price may be allocated across different assets — real estate, equipment, inventory, goodwill — and each category may have different tax treatment. You should work with a tax professional or accountant before selling a business to understand your tax liability and explore any available deductions or deferrals.

Frequently Asked Questions

Do I owe California capital gains tax if I move out of state after selling?

It depends on when you sold the asset and your residency status at the time of sale. If you were a California resident when you sold it, you owe California tax. If you sold it after becoming a non-resident, the answer is more complex and depends on when the gain accrued. You should consult a tax professional about your specific situation.

What if I inherited stock or real estate — do I owe capital gains tax when I sell it?

Usually no, because inherited assets receive a step-up in basis to their fair market value on the date of death. If you sell the asset shortly after inheriting it for roughly the same price, there is no taxable gain. If the asset increases in value after you inherit it and you sell it later, you owe tax only on the gain after inheritance.

Can I deduct investment losses from my capital gains?

Yes. You can subtract capital losses from capital gains. If you have more losses than gains, you can deduct up to $3,000 against ordinary income in a single year, and carry forward the rest to future years. This can significantly reduce your tax bill if you have both winning and losing investments.

Is there a way to defer or reduce capital gains tax on a large sale?

Some strategies exist, such as a 1031 exchange for real estate (which lets you defer tax by reinvesting in similar property) or installment sales (which spread the gain over multiple years). These have strict rules and timing requirements. Consult a tax professional before a large sale to explore what options may explore to your situation.

Do I owe California capital gains tax on cryptocurrency or digital assets?

Yes. California treats cryptocurrency, NFTs, and other digital assets the same as stocks or real estate. When you sell or trade them, any gain is subject to capital gains tax at your income tax rate. You must report the fair market value of the asset on the date of the transaction.