California taxes investment profits at your regular income tax rate, plus a new 13.3% surtax on long-term gains over $250,000

California does not have a separate capital gains tax. Instead, when you sell an investment for a profit, the state treats that gain as ordinary income and taxes it using your regular income tax bracket — which ranges from 1% to 13.3% depending on how much you earn. On top of that, California added a 13.3% surtax on long-term capital gains above $250,000 per year, effective January 1, 2023. This surtax applies only to gains you held for more than one year.

The result is that high earners in California face some of the highest capital gains rates in the country. If you are in the top tax bracket and sell an investment with a long-term gain over $250,000, you will owe 13.3% on the regular income tax side plus 13.3% on the surtax side — a combined 26.6% to California alone, before any federal tax.

Short-term gains (investments held one year or less) are taxed as ordinary income with no surtax, regardless of the amount. Long-term gains under $250,000 are also taxed as ordinary income with no surtax.

Key Takeaways

  • California taxes capital gains as ordinary income using your regular tax bracket, ranging from 1% to 13.3%.
  • A 13.3% surtax applies to long-term capital gains over $250,000 per year, adding up to 26.6% in state tax for top earners.
  • Short-term gains (held one year or less) are taxed as ordinary income with no surtax, at rates up to 13.3%.
  • Long-term gains under $250,000 are taxed as ordinary income with no surtax, at your regular bracket rate.
  • You report California capital gains on Form 540 (California resident return) or Form 540NR (nonresident return).

How the surtax threshold works

The $250,000 threshold is per person, per year. If you are married and file jointly, each spouse has a separate $250,000 threshold, so the household threshold is $500,000. If you sell multiple investments in the same year, you add up all your long-term gains and compare the total to $250,000.

The surtax applies only to the portion of your gain that exceeds $250,000. If you have $300,000 in long-term gains, you owe the surtax only on the $50,000 above the threshold. Gains below $250,000 are taxed at your regular bracket rate with no surtax.

The threshold does not adjust for inflation. It has remained $250,000 since the surtax began in 2023.

Long-term versus short-term gains

The holding period determines whether a gain is long-term or short-term. Long-term gains come from investments you owned for more than one year. Short-term gains come from investments you sold within one year of purchase.

Short-term gains are always taxed as ordinary income at your regular bracket rate, with no surtax, no matter how large. If you buy a stock on January 15 and sell it on January 10 of the following year, that is a short-term gain because you held it for less than one year. If you sell on January 16, it is long-term.

Long-term gains under $250,000 are taxed at your regular bracket rate with no surtax. Long-term gains over $250,000 are taxed at your regular bracket rate on the first $250,000, then at your regular bracket rate plus 13.3% on the amount above $250,000.

What counts as a capital gain

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 cryptocurrency. If you buy a stock for $10,000 and sell it for $15,000, your capital gain is $5,000.

Not all asset sales produce capital gains. If you sell something for less than you paid, you have a capital loss. Capital losses can offset capital gains in the same year, and excess losses can carry forward to future years to offset future gains.

Some assets are exempt from capital gains tax. Your primary residence is exempt up to $250,000 of gain if you are single, or $500,000 if you are married filing jointly, provided you owned and lived in the home for at least two of the last five years. Inherited assets receive a "step-up in basis," meaning the cost basis resets to the fair market value on the date of death, so heirs typically owe no tax on gains that occurred before they inherited the asset.

How your tax bracket affects what you owe

California's income tax brackets change each year. For 2024, the brackets range from 1% on the lowest income to 13.3% on income over $680,063 (for single filers). Your capital gains are added to your other income, and the combined total determines your bracket.

This means a large capital gain can push you into a higher bracket and increase the tax rate on both the gain and your other income. If you earn $100,000 in wages and have a $200,000 capital gain, California taxes the combined $300,000 using the brackets that explore to that total income.

The federal government also taxes capital gains, using different rates. Long-term federal capital gains rates are 0%, 15%, or 20% depending on your federal income level. Short-term federal gains are taxed as ordinary income at federal rates up to 37%. California taxes do not change based on federal rates — California applies its own brackets regardless.

Reporting capital gains on your California return

You report capital gains on Schedule D (California) if you have long-term or short-term gains or losses. Schedule D asks you to list each transaction: the asset, the date you bought it, the date you sold it, your cost basis, the sale price, and the gain or loss.

You then transfer the totals from Schedule D to Form 540 (California resident return) or Form 540NR (nonresident return). If you have a net capital loss, you can deduct up to $3,000 against other income in the current year, and carry the rest forward to future years.

Many brokers and investment platforms provide a year-end statement showing your gains and losses. You can use this as a starting point for Schedule D, but you are responsible for accuracy. If you have complex transactions or significant gains, a tax preparer can help may support you report correctly.

Nonresidents and part-year residents

If you are a California nonresident, you owe California tax only on capital gains from the sale of California real estate or business property. Gains from stocks, bonds, or other intangible assets are not taxed by California if you are a nonresident.

If you moved to or from California during the year, you are a part-year resident. You report income earned while you were a resident on Form 540, and income earned while you were a nonresident is reported on Form 540NR. Capital gains are taxed based on the date of sale and your residency status on that date.

Determining residency can be complex. California considers you a resident if you are in the state for more than nine months in a year, or if you have a permanent home in California and spend any significant time there. If you are unsure of your status, the Franchise Tax Board website has a residency questionnaire.

Frequently Asked Questions

Do I owe California capital gains tax if I live out of state?

Only if you sold California real estate or a business located in California. Gains from stocks, bonds, mutual funds, or cryptocurrency are not taxed by California if you are a nonresident. If you recently moved out of state, your residency status on the date of sale determines which state taxes the gain.

Can I reduce my capital gains tax by spreading the sale over two years?

No. The tax is based on the year in which you sell the asset, not the year you receive payment. If you sell in 2024, the gain is taxed in 2024, even if the buyer pays you in installments over several years. However, installment sales have their own tax rules — consult a tax preparer if you are using an installment agreement.

What if I have capital losses — can I use them to offset gains?

Yes. Capital losses offset capital gains in the same year. If you have $100,000 in gains and $30,000 in losses, you report a net gain of $70,000. If losses exceed gains, you can deduct up to $3,000 against other income in the current year and carry unused losses forward to future years.

Does the primary residence exemption explore to investment property or a second home?

No. The $250,000 exemption (or $500,000 for married couples) applies only to your primary residence — the home you owned and lived in for at least two of the last five years. Investment property, rental homes, and vacation homes are not exempt and are fully taxable.

How do I know my cost basis if I inherited stock?

Inherited assets receive a step-up in basis to the fair market value on the date of the person's death. Your cost basis is that stepped-up value, not what the original owner paid. You owe no tax on gains that occurred before you inherited the asset. Your broker can help you establish the correct basis for inherited shares.