If you’re selling a home, investment property, stocks, or cryptocurrency in California, understanding CA capital gains tax is essential to keeping more of your profits. California doesn’t mess around when it comes to capital gains—the state taxes investment income at the same rates as ordinary income, which means you could face some serious tax bills if you’re not prepared. In this guide, we’ll break down how California’s capital gains tax works, who pays it, and most importantly, how you can legally minimize what you owe.
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What Is Capital Gains Tax?
Capital gains are the profits you make when you sell an asset for more than you paid for it. If you bought Apple stock at $100 per share and sold it at $150, that $50 difference is your capital gain. California taxes this profit, and here’s where it gets painful: unlike many states that have no capital gains tax or offer preferential rates, California treats capital gains as regular income.
This means if you’re a high earner in California and you sell a rental property with a $200,000 gain, that $200,000 gets added to your taxable income for the year. If you’re already in a high tax bracket, you could end up paying 37% or more in combined state and federal taxes on that gain.
The good news? Not all capital gains are created equal. The timing of your sale matters tremendously.
California’s Tax Rates Explained
California’s capital gains tax rates are progressive, meaning they increase as your income goes up. For the 2024 tax year, here’s what you’re looking at:
- 10.3% for most taxpayers (standard state income tax rate)
- 11.3% if you’re in the highest bracket (income over $680,000 for single filers)
- 13.3% if you fall into the highest income bracket and have income over $3.2 million (this is the 1% tax on high earners)
These rates apply on top of federal capital gains taxes, which range from 0% to 20% depending on your income level. So a California resident in the top federal bracket could pay up to 33.3% in combined state and federal taxes on long-term capital gains—and potentially more if you’re subject to the Net Investment Income Tax.
Short-Term vs. Long-Term Gains
Here’s a critical distinction that can save you thousands: how long you hold an asset before selling it.
Short-term capital gains (assets held 12 months or less) are taxed as ordinary income at your full marginal tax rate. If you’re in California’s highest bracket, that’s 13.3% state tax alone, plus federal tax on top.
Long-term capital gains (assets held more than 12 months) get preferential federal tax treatment: 0%, 15%, or 20% depending on your income level. However—and this is important—California ignores this federal preferential rate and taxes long-term gains as ordinary income anyway.
This is one of the biggest differences between California and other states. A resident of Texas or Florida with the same investment gain pays zero state tax. A Californian pays the full state rate. It’s not fair, but it’s the law.
Federal vs. State Capital Gains
Let’s clarify how federal and state taxes work together, because they’re separate systems.
Federal capital gains tax: The IRS taxes long-term gains at preferential rates (0%, 15%, or 20%) based on your taxable income. Single filers in 2024 get the 0% rate if they earn under $47,025, the 15% rate between $47,025 and $518,900, and 20% above that.
California capital gains tax: California adds its own layer. There’s no preferential rate—it’s all ordinary income tax rates. You’ll file Form 1099-B or Schedule D on both your federal return (Form 1040) and your California return (Form 540).
The result? You might pay 15% federal tax and 13.3% state tax on the same gain, totaling 28.3%. That’s why tax planning matters.
Net Investment Income Tax
If you’re a higher earner, there’s another tax lurking in the background: the Net Investment Income Tax (NIIT), also called the 3.8% tax.
If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you owe an additional 3.8% federal tax on the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.
So if you’re a single filer earning $250,000 and you realize a $50,000 capital gain, you’d owe the NIIT on that gain because your MAGI exceeds $200,000. That’s another $1,900 in federal tax, on top of everything else.
This tax applies to capital gains, dividends, interest, and other investment income. It’s easy to overlook, but it can significantly increase your total tax bill.
Selling Your Home: Special Rules
Here’s one of the few bright spots: the primary residence exclusion. If you sell your main home, you can exclude up to $250,000 of gain if you’re single ($500,000 if married filing jointly), provided you meet these requirements:
- You owned the home for at least 2 of the last 5 years
- You lived in it as your primary residence for at least 2 of the last 5 years
- You haven’t used the exclusion in the past 2 years
California follows the federal rule, so if you sell your home with a $150,000 gain, you owe zero California and federal tax on that gain. This is huge. But note: this only applies to your primary residence, not investment properties or second homes.
If you’re selling a rental property or investment real estate, you don’t get this exclusion, and you’ll owe full capital gains tax on the profit.
Strategies to Reduce Your Bill
Now for the practical stuff: how to legally minimize your CA capital gains tax.
1. Hold assets longer than 12 months
While California doesn’t offer a preferential rate, holding for over a year still matters because you’ll get the federal preferential rate. That 15% federal rate beats the 37% short-term rate.
2. Harvest tax losses
If you have losses in some investments, sell them to offset gains in others. If you sell a stock at a loss, you can use that loss to reduce your capital gains. You can even carry forward unused losses to future years.
3. Donate appreciated assets to charity
Instead of selling appreciated stock and paying capital gains tax, donate the shares directly to a qualified charity. You avoid the capital gains tax entirely and get a charitable deduction for the full fair market value. This is incredibly powerful if you have large unrealized gains.
4. Use a settlement tax calculator for large transactions
If you’re dealing with a major sale—whether it’s a settlement, property, or business—use a tax calculator to model different scenarios before you finalize the deal.
5. Time your sales strategically
If you’re on the edge of a tax bracket, consider whether selling in December or January makes a difference. Spreading gains across two tax years can sometimes lower your overall rate.
6. Consider installment sales
For real estate, an installment sale lets you spread the gain (and tax) across multiple years, potentially keeping you in a lower bracket each year.
7. Consult a tax strategist before major sales
If you’re selling a home, business, or significant investment, professional guidance isn’t optional—it’s essential. The cost of a tax advisor often pays for itself many times over.
How to Report Capital Gains
You’ll report capital gains on Schedule D (Form 1040) for federal taxes and Schedule CA (Form 540) for California. Here’s what you need:
- Purchase date and price (your cost basis)
- Sale date and price
- Holding period (to determine if it’s short-term or long-term)
- Broker statements or documentation of the transaction
If you sold real estate, you’ll also file Form 8949 (Sales of Capital Assets) to report the details. For stocks and mutual funds, your broker will send you Form 1099-B showing your sales.
California requires you to report all capital gains, even if you don’t owe federal tax (due to the primary residence exclusion or other reasons). The state wants to know about every transaction.
If you’re dealing with a large settlement or property sale, use a settlement tax calculator to estimate your liability before filing, so there are no surprises.
Frequently Asked Questions
Do I owe capital gains tax if I sell at a loss?
No, you don’t owe tax on losses. In fact, you can use capital losses to offset capital gains. If your losses exceed your gains, you can deduct up to $3,000 of losses against ordinary income in a single year. Any excess carries forward to future years.
Is cryptocurrency subject to California capital gains tax?
Yes. Selling crypto, trading it for other crypto, or even spending it counts as a taxable event. If you bought Bitcoin at $30,000 and sold it at $50,000, you owe capital gains tax on the $20,000 gain. This applies to California and federal taxes. Many people overlook this, leading to big surprises at tax time. For more on this topic, see our crypto tax guide.
What if I inherited stocks—do I owe capital gains tax?
You get a “step-up in basis” when you inherit assets. This means your cost basis is adjusted to the fair market value on the date of death. If your parent bought a stock at $50 and it was worth $200 when they died, your basis is $200. If you sell it immediately at $200, you owe zero capital gains tax. This is one of the few tax breaks the wealthy get, and it’s significant.
Can I avoid California capital gains tax by moving out of state before selling?
Not easily. California taxes residents on worldwide income, regardless of where they live. If you’re a California resident when you realize the gain, California taxes it. You’d need to establish residency in another state and prove you’re no longer a California resident. This requires more than just moving—it involves changing your driver’s license, voter registration, and demonstrating other ties to the new state. The IRS and California Franchise Tax Board scrutinize these claims heavily.
How are capital gains taxed differently in other states?
It varies widely. Some states like Texas, Florida, and Wyoming have no capital gains tax at all. Others tax long-term gains at preferential rates or exclude them entirely. Washington State recently passed a capital gains tax on long-term gains above $250,000 (1.75% tax), but it’s facing legal challenges. California’s approach—taxing all gains as ordinary income—is one of the harshest in the nation.
Should I use a 1031 exchange to avoid capital gains tax?
A 1031 exchange allows you to defer capital gains tax by reinvesting the proceeds into a like-kind property. For real estate, you can exchange a rental property for another rental property and defer the tax. However, you must follow strict rules: identify the replacement property within 45 days and close within 180 days. This doesn’t eliminate the tax—it just defers it. Eventually, when you sell the replacement property without doing another 1031 exchange, you’ll owe the tax. It’s a useful tool for real estate investors, but it’s not a permanent tax dodge.
Do I need to pay estimated taxes on capital gains?
If you expect to owe more than $1,000 in taxes for the year, you should pay estimated taxes quarterly. This applies to capital gains realized mid-year. If you’re selling a home or large investment in December, you might owe a big chunk in April. To avoid penalties, consider making a quarterly estimated tax payment (Form 1040-ES) in the quarter you realize the gain.
Key Takeaways
California’s capital gains tax is unforgiving, but you have tools to manage it. The state taxes investment gains as ordinary income, meaning rates up to 13.3% at the state level alone. Long-term gains get preferential federal treatment (0%, 15%, or 20%), but California ignores this—you still pay the full state rate. The primary residence exclusion is your biggest break: sell your main home and exclude up to $250,000 of gain. For investment properties, losses, and large transactions, tax planning is essential. Consider tax-loss harvesting, charitable donations of appreciated assets, installment sales, and professional guidance before major transactions. Report all gains on Schedule D (federal) and Schedule CA (California), and don’t forget about the 3.8% Net Investment Income Tax if you’re a higher earner.
