Are Capital Gains Really Taxed at the State Level? – Don’t Make This Mistake + FAQs

Selling an investment for a profit feels great – until the tax bill arrives. Most people know the IRS taxes capital gains at the federal level. But what about your state? Are capital gains taxed at the state level, too?

State vs. Federal Capital Gains Tax: The Quick Answer

Yes – most U.S. states tax your capital gains in addition to the federal capital gains tax. In other words, when you sell stocks, real estate, or other assets at a profit, both Uncle Sam and your state may impose tax on the gain. Here’s the breakdown:

• Under federal law: Capital gains (the profit from selling a capital asset) are definitely taxed. The IRS charges a capital gains tax on profits from sales of stocks, bonds, real estate, and other investments. Federal tax rates depend on how long you held the asset – long-term gains (assets held over a year) get special lower tax rates (0%, 15%, or 20% typically), while short-term gains (held one year or less) are taxed as ordinary income (at your regular tax brackets). So federally, you will pay tax on your gains, with the rate varying by holding period and income level.

• Under state law: Each state decides whether and how to tax capital gains. Most states do tax capital gains as part of their state income tax. In states with a personal income tax, your capital gains are usually just treated as regular income and taxed at the state’s income tax rates. A few states even have special rules (like different rates or partial exclusions for capital gains), and some states have no income tax at all, which means no state tax on capital gains in those places. There’s also one unique case – Washington state – which has no general income tax but recently implemented a 7% tax on capital gains over a certain amount. Overall, the majority of states will require you to pay state tax on your capital gains, but the exact amount and rules vary widely by state.

Bottom line: If you realized a capital gain, the IRS will tax it and your state might, too – depending on where you live. For example, a $10,000 long-term stock gain would incur federal tax (maybe $1,500 if you’re in the 15% bracket) plus state tax if your state taxes income (the amount could range from just a few hundred dollars to over $1,000, depending on your state’s rates). On the other hand, if you live in a state like Florida or Texas that doesn’t levy income tax, you’d owe zero state tax on that gain (you’d still owe federal tax, of course). In short, capital gains are taxed at the state level in most states, under each state’s tax laws, while a handful of states spare you from any state capital gains tax.

Now, let’s break down the details and differences so you know exactly how this works.

Capital Gains Tax 101: Key Terms Defined

Before we dive deeper, let’s clarify some key tax terms related to capital gains. Understanding these will help make sense of federal vs. state rules:

• Capital Asset: Almost anything you own for investment or personal purposes can be a capital asset. Common examples include stocks, bonds, real estate property, land, a business, or even collectibles like art. When you sell a capital asset for more than you paid, that profit is a capital gain.

• Capital Gain: This is the profit you earn from selling a capital asset for more than its purchase price. For example, if you bought stock for $5,000 and later sold it for $8,000, you have a $3,000 capital gain (minus any selling fees). If you sell for less than what you paid, that’s a capital loss.

• Realized vs. Unrealized Gain: A gain is only taxed when it’s realized. Realized means you actually sold the asset and locked in the profit. An unrealized gain is a paper gain – e.g. your stock went up in value but you haven’t sold it yet – unrealized gains aren’t taxed (yet). Both federal and state taxes apply only to realized capital gains.

• Short-Term vs. Long-Term Capital Gain: This refers to how long you held the asset before selling. Short-term means one year or less, and these gains are taxed at the same rate as your ordinary income (your paycheck, etc.). Long-term means more than one year, and these gains get preferential tax treatment federally – typically a lower tax rate than regular income. (Many states, however, do not give a lower rate for long-term gains – more on that soon.)

• Capital Gains Tax Rate: This is the percentage of your gain that you’ll pay in tax. The federal capital gains tax rate for long-term gains is 0%, 15%, or 20% depending on your income (higher income = 20% rate). Short-term gains are taxed at your ordinary income tax rate (which could be anywhere from 10% to 37% federally). State capital gains tax rates vary by state – in most cases it’s just your normal state income tax rate. Some states have a single flat income tax rate (e.g. Illinois taxes all income, including gains, at 4.95%), while others have brackets (e.g. California taxes income (and gains) up to 13.3% at the top bracket). A few states have special reduced rates or exclusions for capital gains.

• State Income Tax: This is a tax levied by a state on your income. Income includes wages, interest, dividends, and capital gains (except in states that choose to exclude or not tax certain categories). If a state has no income tax, it generally has no tax on capital gains either, since capital gains are a type of income. If a state does have an income tax, it will usually include capital gains in your taxable income (with possible special rules as we’ll see).

• Taxable Income: For income tax (federal or state), this is the portion of your income that is subject to tax after deductions. Capital gains can be part of your taxable income. For example, federally, if you have $50k of salary and a $10k capital gain, your taxable income includes that $10k gain. States often use your federal taxable income or adjusted gross income as a starting point for state taxes, which means your gains are automatically included unless the state specifically subtracts or treats them differently.

• Exclusion/Deduction (for capital gains): Some state tax laws allow an exclusion or deduction for a portion of capital gains. For instance, a state might say “exclude 40% of long-term capital gains from taxable income,” meaning you only pay tax on the remaining 60%. These are essentially tax breaks to encourage investment or certain long-term holdings.

Now that we have these terms down, let’s explore how capital gains taxes differ across states and how they compare to federal rules.

How States Tax Capital Gains: An Overview

States vary widely in how they tax (or don’t tax) capital gains. Here are the key points to know:

• Most states tax capital gains as part of their state income tax. If your state has a personal income tax, you should assume your capital gains will be included in that taxable income. For example, if you live in Georgia and sell some stocks for a profit, Georgia will tax that gain at its normal income tax rates (up to 5.75%). If you live in California and have a big capital gain, California will tax it at the same rate as your other income – and California’s top rate is high (over 13%). Essentially, in these states, there’s no special treatment – a dollar of capital gain is taxed just like a dollar of salary.

• Some states offer special breaks for capital gains. A handful of states have laws that reduce the tax on long-term capital gains. For instance, Wisconsin lets you deduct 30% of long-term capital gains (so you only pay tax on 70% of the gain), and even more (60%) if the gain is from farm assets. South Carolina excludes 44% of long-term capital gains from income – meaning only 56% is taxed by the state. Arizona provides a 25% exclusion for long-term gains. New Mexico allows the greater of a $1,000 deduction or 40% of the gain to be deducted. Montana effectively taxes capital gains at a lower rate by giving a credit (resulting in an effective top rate of around 4% on capital gains instead of the usual ~6.75%). Hawaii has a special 7.25% tax rate cap on capital gains (Hawaii’s ordinary income tax goes up to 11%, but long-term gains top out at 7.25%). Vermont allows a 40% exclusion for gains on assets held more than three years (with some limits). We’ll see more details in the state-by-state table, but the big takeaway is that only a minority of states provide such preferential treatment.

• Eight states have no income tax, and thus no tax on capital gains. These states are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Wyoming, and (effectively) New Hampshire. In these states, you won’t pay any state tax on capital gains, because they simply don’t tax personal income. (New Hampshire is a special case – it doesn’t tax earned income or capital gains, but it has until now taxed interest and dividend income. That tax is being phased out by 2025. For practical purposes, NH residents don’t face state tax on capital gains.) If you live in one of these no-income-tax states, your only capital gains tax bill comes from the federal side.

• Local taxes: While we’re focusing on states, note that a few localities add their own income tax as well. For example, New York City and some other cities have local income taxes, which means they would tax capital gains on top of state and federal taxes. This article mainly covers state-level taxes, but be aware of local taxes if you live in such an area.

• Unique case – Washington State: Washington does not have a traditional income tax on wages or investment income, but it recently enacted a 7% tax on capital gains over $250,000 (applicable to long-term gains from the sale of assets like stocks and bonds). This law, which took effect in 2022, essentially means high earners in Washington will pay state tax on large capital gains even though there’s no tax on ordinary income. (Notably, Washington’s capital gains tax exempts real estate sales and certain other assets, and it only kicks in on the portion of gains above $250k.) This is a rare instance of a state taxing capital gains without taxing other income.

• Do states follow federal long-term vs short-term rules? Generally, states do not give a lower rate for long-term vs short-term capital gains unless they’ve specifically written that into their law (like the examples above). Most states simply tax all capital gains as ordinary income. A few states, however, do distinguish or have separate rules. For example, Massachusetts taxes long-term capital gains at 5% (its standard rate), but short-term gains (assets held one year or less) are hit with a higher Massachusetts rate (recently 8.5%). Most states don’t do this – they treat long and short-term the same for state taxes – but it’s worth noting for certain states like MA. In contrast, the federal system heavily favors long-term gains (0-20% rates) over short-term (ordinary rates up to 37%).

Now, to really understand the landscape, let’s look at how each of the 50 states handles capital gains tax. The table below summarizes the capital gains tax policy in every state, including whether the state taxes capital gains and any special rules or rates.

State Tax Rates on Long-Term Capital Gains (2024). Blue states levy lower tax rates on long-term capital gains than on ordinary income (offering a break for investors). Yellow states impose higher effective taxes on capital gains than on wage income (e.g. an extra surtax for investments). Gray states tax capital gains at the same rates as regular income. White (no shading) indicates no state tax on capital gains (usually because the state has no income tax). As illustrated, the majority of states tax capital gains just like other income, with only a few offering reduced rates or exclusions, and a handful having no capital gains tax at all.

State-by-State Capital Gains Tax Rates

Below is a breakdown of capital gains tax policies for all 50 U.S. states. Each state entry notes whether capital gains are taxed and highlights any special rules or unique rates.

Table Notes: “Yes” means the state does tax capital gains (typically through its income tax). “No” means no state tax on capital gains (usually due to no income tax). Top rates are given for context; many states have lower brackets for lower incomes. Remember that state tax rules can change, so always double-check current law, especially if you have a significant transaction.

As you can see, if you live in a state with an income tax, you’ll likely owe some state tax on your capital gains. The range is wide – it can be as high as ~13% extra in California (on top of federal tax) or 0% in a no-tax state. A few states fall in between by giving partial exclusions or special lower rates (like the blue-colored states on the map).

Next, let’s look at some practical examples to illustrate how these differences play out in real life.

Real-Life Examples of State Capital Gains Taxes

To make this more concrete, here are a few scenarios showing how capital gains taxation differs depending on the state:

Example 1: California vs. Texas – A High-Tax State vs a No-Tax State
Scenario: Imagine you sold stock for a $50,000 long-term capital gain. You’re in a fairly high income bracket. What happens for taxes?

• Federal: First, you owe federal capital gains tax. Let’s say you fall into the 15% federal capital gains bracket. That’s $7,500 to the IRS (15% of $50k). Everyone pays the same federal rate regardless of state.

• California Resident: California will treat that $50k gain as additional income on your state return. If you’re already in the top bracket, CA will hit it with 13.3% state tax. That’s about $6,650 in state tax. Combined with federal, you’re paying roughly $14,150 on $50k of gain – effective tax ~28.3%. Even if you’re not in the top bracket, California’s rates are high – for example, if you’re in a middle bracket, say 9.3%, you’d owe $4,650 to CA. Either way, California takes a substantial extra cut. There is no relief for it being a long-term gain – it’s fully taxed.

• Texas Resident: Texas has no income tax, so you owe $0 to Texas on that $50k gain. Your only tax is the $7,500 to the IRS. Your effective tax rate is just 15% total. That’s a huge difference from California!

The difference: In CA, you might pay almost double the tax rate on that gain compared to TX. This example shows why high-tax states can significantly increase the tax cost of selling investments. Over $50k gain, a CA resident could pay several thousand dollars more than a TX resident. This also explains why some people consider moving before realizing very large gains (e.g., entrepreneurs selling a company or investors cashing out big positions might change residency to a no-tax state to save money).

Example 2: Using State Exemptions – Oklahoma Land Sale
Scenario: You’re an Oklahoma resident and you sell a piece of land in Oklahoma that you’ve owned for 10 years, netting a $100,000 long-term capital gain.

• Federal: Assume a 15% federal capital gains rate again. You’d owe $15,000 to the IRS on the $100k gain.

• Oklahoma: Now, Oklahoma’s normal income tax on $100k would be 4.75%, around $4,750. But because this property is Oklahoma real estate that you held for over 5 years, it qualifies for Oklahoma’s 100% capital gains tax deduction on in-state property. That means Oklahoma won’t tax this gain at all. You get to deduct the entire $100k gain on your Oklahoma tax return, resulting in $0 state tax due on it.

• Result: You pay $15,000 federal, and $0 to the state. If the land were not in Oklahoma (say you sold land in another state or you sold stock in a national company), you would not get this break and would owe the $4,750 to Oklahoma. But thanks to this state-specific exemption, you saved nearly $5k in state taxes. This example illustrates how knowing your state’s special provisions can pay off. Oklahoma rewards investments in local assets; other states like Wisconsin (extra break for farm property) or New Mexico (40% exclusion on any gain) similarly reduce the tax on qualifying gains.

Example 3: Timing Matters – Short-Term vs. Long-Term in a State
Scenario: You live in Massachusetts and have a big gain on a stock. You’re debating selling now versus holding a bit longer. You bought the stock 10 months ago. If you sell now, it’s a short-term gain; if you wait 2 more months, it becomes long-term. Let’s assume the gain is $10,000 and that you’re in a high income bracket.

• Federal: If you sell now (short-term), that $10k is taxed as ordinary income. If you’re in, say, the 24% federal bracket, that’s $2,400 federal tax. If you wait until it’s long-term, it might be taxed at 15% instead (assuming you fall in the 15% cap gains bracket), which would be $1,500. That’s $900 saved federally by waiting for long-term treatment.

• Massachusetts: If you sell now (short-term), MA will tax that gain at 8.5% (the short-term capital gains tax rate in MA). 8.5% of $10k is $850 in state tax. If you hold and sell after a year (long-term), MA taxes it at 5%, so that would be $500 in state tax. That’s an additional $350 saved by waiting (in state taxes).

• Combined: By holding the asset until it qualifies as long-term, you’d save $900 federal + $350 state = $1,250 total tax savings on a $10k gain. That’s a clear incentive. This example shows that while most states don’t care about short vs long term, a few (like Massachusetts) do impose higher state tax on short-term gains. Even in states that don’t have different rates, there’s still the federal incentive to go long-term. So one general tip: avoid short-term gains when possible, since you’ll pay more tax (federally for sure, and even at the state level in certain states).

Example 4: Moving States Before a Big Sale
Scenario: You’re a resident of New York, and you’re planning to sell your business in a year, expecting a very large capital gain. New York would tax that gain at up to 10.9%. You are already considering moving to Florida for retirement. Does it matter when you move?

• If you sell while still a New York resident, you will owe New York state income tax on the gain (potentially a lot, given NY’s high rate for big incomes). For a $1,000,000 gain, state tax could be around $100k+.

• If you establish Florida residency before the sale (and genuinely move there, since merely renting a condo won’t fool the tax authorities), then when you sell your business, you’re a Florida resident. Florida has no income tax, so Florida won’t tax the gain at all. You’d avoid that $100k NY tax. You would still owe federal capital gains tax, of course, but skipping out on NY’s share is significant.

• Caveat: If the business assets are located in New York or the income is considered New York-sourced, New York might still try to tax nonresidents on the portion sourced to NY. Generally, though, capital gains from the sale of intangible property (like stocks, ownership in a company) are taxed by your state of residence, not where the company is located. That means changing residency before the sale can lawfully reduce your state tax to zero (in a no-tax state). This is a strategy some people use for very large gains – but it requires actually moving and cutting ties with the high-tax state, which is a big decision beyond just taxes.

This example highlights that tax planning across states can make a huge difference. It’s perfectly legal to move to a more tax-friendly jurisdiction before a big transaction, but be mindful of the rules (states often have “residency audits” to ensure people really moved if large tax dollars are at stake).

From these scenarios, you can see: the state you live in (and sometimes the timing of your actions) can dramatically change how much tax you pay on a capital gain. Next, we’ll discuss some common mistakes and pitfalls to avoid when managing capital gains, especially with state taxes in mind.

5 Mistakes to Avoid When Managing Capital Gains Taxes

When dealing with capital gains and state taxes, it’s not just about what to do – knowing what not to do is equally important. Here are five common pitfalls taxpayers should avoid:

1. 🚫 Ignoring State Taxes (Don’t Assume Only Federal Taxes Matter): One big mistake is focusing only on the IRS bill and forgetting about your state. Always remember that if you live in a state with income tax, that state likely wants its share of your capital gain. Failing to account for state tax can leave you with a surprise bill (or even under-withholding penalties) come tax time. Avoid this by checking your state’s policy whenever you plan a sale – factor in the state tax rate so you know your true total tax liability.

2. 🚫 Assuming All States Are the Same: Taxpayers sometimes assume capital gains are taxed uniformly everywhere. In reality, state rules differ a lot. For example, don’t assume that because the federal government gives you a break for long-term gains, your state does too – many do not. Conversely, if you move from one state to another, don’t assume the tax treatment is identical. Avoid applying old rules to your new state; always update your knowledge of the specific state’s tax law. (Use resources like the state-by-state table above as a starting point.)

3. 🚫 Selling Assets Without Considering Timing: Timing can significantly affect taxes. Selling just weeks or days before hitting the one-year mark means your profit will be a short-term gain – incurring higher federal taxes (and in a few states, higher state taxes too). Likewise, realizing a huge gain in one tax year could bump you into a higher state tax bracket (if your state has progressive rates). Avoid rashly selling without considering if waiting could qualify you for lower tax rates (federal long-term rates or state breaks like Vermont’s 3-year rule). On the other hand, if you’re planning to move to a no-tax state soon, you might want to postpone selling until after the move. Good tax planning can save thousands by simply timing the sale strategically.

4. 🚫 Forgetting to Report State Tax on Out-of-State Sales: If you sell property located in another state (like real estate or a business property), don’t assume only that state’s tax matters. Usually, the state where the property is located will tax the sale and your home state may also tax you (as your worldwide income). You typically get a credit to avoid double taxation, but you might need to file a tax return in the state where the property was sold. Avoid trouble by understanding filing requirements – for example, a California resident who sells investment property in Oregon will owe Oregon tax on the gain and must file an Oregon nonresident return, and still report the gain on their California return (with CA giving a credit for the Oregon tax). Missing that nonresident filing or failing to claim credits correctly is a common mistake. Always check if a capital gain involves multi-state tax rules.

5. 🚫 Letting Tax Avoidance Lead to Bad Decisions: It’s wise to manage and minimize taxes, but don’t let the tail wag the dog. For instance, don’t hold onto a crashing investment just to reach a long-term holding period – you might lose more in value than you’d save in taxes. Similarly, don’t move states solely for a tax break without considering all other factors (career, family, cost of living). Avoid shady schemes to hide or evade taxes – states share data with the IRS and mismatches (like reporting a gain federally but not on your state return) will be caught. In short, be mindful of taxes but make decisions holistically. Use legal methods to reduce capital gains tax (like timing, using primary home exclusions, investing through retirement accounts, etc.), and steer clear of anything that sounds too good to be true or overly complicated just to dodge state tax.

By avoiding these common pitfalls, you can manage your capital gains more effectively and legally minimize the tax bite, both federally and at the state level.

FAQs on State Capital Gains Tax

Q: Do all states tax capital gains?
A: No. Most states do, but a handful (like Alaska, Florida, Texas, and others with no income tax) do not tax capital gains at all. It depends entirely on the state.

Q: Which states have no capital gains tax?
A: States with no income tax also have no capital gains tax. These include Florida, Texas, Alaska, Nevada, South Dakota, Wyoming, Tennessee, and New Hampshire. (Washington taxes only very high capital gains.)

Q: Are state capital gains taxes in addition to federal taxes?
A: Yes. State capital gains tax is separate from and in addition to the federal capital gains tax. You may owe federal tax, state tax, or both on a gain, depending on where you live.

Q: Do states tax long-term and short-term capital gains differently?
A: In most states, no – they tax all capital gains as ordinary income. A few states do differentiate: e.g. Massachusetts and Oregon tax short-term gains at higher rates, while Hawaii and South Carolina offer lower effective rates for long-term gains.

Q: If I move to a no-tax state, do I avoid state tax on gains?
A: Generally, yes – once you are a bona fide resident of a no-income-tax state, that state won’t tax new capital gains you realize. Just make sure the gain isn’t from property located in your old state (which might still tax it), and that you legitimately changed residency before the sale.

Q: Will I owe state tax on the sale of my primary home?
A: Usually no, if you qualify for the federal home sale exclusion (up to $250k gain exempt, or $500k for joint filers). Almost all states follow the federal rule and do not tax the excluded portion of a primary home sale. Any gain above the excluded amount, though, would be subject to state tax in states that tax capital gains.

Q: How can I reduce or avoid state capital gains tax?
A: Strategies include moving to a lower-tax state before selling (if practical), timing sales for long-term status, using tax-advantaged accounts (IRAs, 401(k)s) for investments, utilizing the primary residence exclusion, and offsetting gains with capital losses. Also, take advantage of any state-specific deductions (like Oklahoma’s or Wisconsin’s) if you qualify. Always ensure these moves make sense overall, not just for taxes.

Q: Are capital gains taxed twice (federally and by the state)?
A: It can feel like it, but it’s not “double taxation” in the legal sense – federal and state taxes are separate sovereign taxes. If your state taxes capital gains, you’ll pay tax on the same gain to both the IRS and your state. There’s no federal deduction for state capital gains tax paid (except as part of the itemized deduction for state taxes, which is capped), so yes, you effectively pay two bills on one gain in many cases.