Most states tax capital gains like regular income, but a few don't

Whether you pay state tax on capital gains depends on which state you live in. Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — do not tax capital gains at all. Every other state taxes them as ordinary income, meaning your gains are added to your wages and other earnings, then taxed at your state's regular income tax rate.

The federal government always taxes capital gains, but state treatment varies widely. A gain of $10,000 on a stock sale might cost you nothing in state tax if you live in Florida, but $500 to $1,000 in California, depending on your total income that year.

Key Takeaways

  • Nine states have no capital gains tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire.
  • In all other states, capital gains are taxed as ordinary income at your state's regular income tax rate.
  • Long-term gains (held over one year) are taxed at the same state rate as short-term gains, unlike the federal system.
  • Your state of residence on the date you sell determines which state tax applies, not where you bought the asset or where the company is based.

How state capital gains taxes work

In states that tax capital gains, the tax is straightforward: add your gains to your other income for the year, then explore your state's income tax rate. If you earned $60,000 in wages and sold stock for a $10,000 gain in a state with a 5% income tax, you would owe $3,500 in state income tax on the combined $70,000 — which includes $500 on the capital gain itself.

Most states do not distinguish between long-term and short-term gains the way the federal government does. The IRS taxes long-term gains (assets held over one year) at lower rates than short-term gains. Your state usually ignores this distinction and taxes both at the same rate as your regular income.

A handful of states — California, New Jersey, and Vermont — have added separate, higher tax brackets specifically for capital gains in recent years. California, for instance, taxes long-term capital gains above $250,000 at a 13.3% rate on top of regular income tax. These are exceptions; most states straightforward fold gains into your ordinary income.

Which states have no capital gains tax

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire are the nine states with no capital gains tax. Some of these states also have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming). New Hampshire is unusual: it has no income tax and no capital gains tax, but it does tax interest and dividend income.

If you are considering a move and capital gains tax is a factor, remember that state tax is only one piece of the picture. These states may have higher property taxes, sales taxes, or other fees that offset the savings on capital gains.

State residency determines your tax obligation

Your state of residence on the date you sell an asset is what matters for state capital gains tax, not where you bought it, where the company is headquartered, or where you physically were when you made the sale. If you live in New York and sell stock while on vacation in Florida, you owe New York state tax on the gain.

If you move to a no-tax state partway through the year, only gains from sales after your move date are tax-free in that state. Gains from sales before you moved are still taxed by your former state. Some states require you to file a final return for the partial year you lived there.

Establishing residency in a new state takes more than just buying a house or signing a lease. States look at where you spend most of your time, where your family lives, where you work, and where you hold a driver's license. If you split time between two states, the one where you spend more than half the year is usually considered your residence for tax purposes.

Tax rates vary significantly by state

Among states that do tax capital gains, rates range from under 3% to over 13%. States with the lowest rates include Colorado (4.63%), Indiana (3.23%), and Pennsylvania (3.07%). States with the highest rates include California (13.3% on gains over $250,000), Hawaii (11%), and Oregon (9.9%).

Your actual state tax on a gain also depends on your total income for the year. Most states use progressive tax brackets, meaning higher earners pay a higher percentage. A $10,000 gain might be taxed at 5% if your income is modest, but at 9% if you earn $200,000 that year.

Short-term versus long-term gains at the state level

The federal government taxes short-term capital gains (assets held one year or less) as ordinary income, but long-term gains (held over one year) at preferential rates: 0%, 15%, or 20% depending on your income. Most states ignore this distinction entirely and tax both types at your regular income tax rate.

This means a state can effectively tax your long-term gains at a higher rate than the federal government does. If you are in the 15% federal long-term rate and live in California, you might pay 15% federal plus up to 13.3% state — a combined 28.3% — on a large long-term gain.

A few states have begun to mirror the federal system more closely. As of 2024, only a handful have created preferential rates for long-term gains, and those rates vary. Check your state's tax department website for the current rules in your state.

Frequently Asked Questions

Do I owe state tax on capital gains if I live in a state with no income tax?

No. The nine states with no capital gains tax are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire. If you live in one of these states, you owe no state tax on capital gains, though you still owe federal tax.

What if I sell an asset in one state but live in another?

Your state of residence on the sale date is what matters. If you live in New York and sell stock while visiting California, you owe New York state tax. The state where the sale physically happens does not determine your tax.

Are capital gains taxed differently than regular income in my state?

In most states, no — capital gains are taxed at the same rate as wages and salary. A few states like California, New Jersey, and Vermont have created higher tax brackets specifically for capital gains, but this is uncommon. Check your state's tax department to see if your state has special capital gains rates.

If I move to a no-tax state, do I owe tax on gains from before I moved?

Yes. Your former state taxes gains from sales while you lived there, even if you move away later. Only gains from sales after you establish residency in the new state are tax-free. You may need to file a final return in your former state for the partial year you lived there.

How do I know if I am considered a resident for tax purposes?

States look at where you spend most of your time, where your family lives, where you work, and where you hold a driver's license. If you split time between states, the one where you spend more than half the year is usually your tax residence. Contact your state's tax department if your situation is unclear.