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California Capital Gains Tax


When someone makes an investment, they’re obviously hoping that it ends up making them money. Otherwise, there would be no point to the investment. If you do increase your net worth through investments, though, you’ll likely have to pay taxes to your state and federal government. These are called capital gains taxes, and they don’t work quite the same as taxes on other income. Though the federal capital gains tax is often in the news and subject to political debate, there are also capital gains taxes assessed at the state level. If you live in California, consider working with a financial advisor who can help you plan for these taxes.

What Is the Capital Gains Tax?

The capital gains tax is one assessed on money earned from an investment, as opposed to from wages or salary. Those earnings are generally taxed through a standard income tax, which most people encounter on every paycheck they receive.

In some areas, capital gains are treated differently depending on how long the investor held the asset prior to selling. These distinctions are generally split between short-term (less than a year) and long-term (at least a year).

Short term capital gains taxes are levied on money earned from investments that were held by the investor for less than a year. These are often higher, due to their quick turnaround. At the federal level, they are taxed as regular income which, depending on your income level, could leave you paying more than 20%.

When someone holds an asset for more than a year, the long-term capital gains tax generally applies. The federal long-term capital gains tax is lower than both its short-term counterpart and income tax rates. This is also true for some states, as there may be a system of tax brackets where the rate is higher as the money earned increases. In some other places, these gains may be taxed at a flat rate.

California Capital Gains Taxes

Unlike the federal government, California makes no distinction between short-term and long-term capital gains. It taxes all capital gains as income, using the same rates and brackets as the regular state income tax.

The following table shows the tax rates that apply to both income and capital gains in California:

California Capital Gains Tax Rates

RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
1%$0 – $8,932$0 – $17,864$0 – $8,932$0 – $17,864
2%$8,933 – $21,175$17,865 – $42,350$8,933 – $21,175$17,865 – $42,353
4%$21,176 – $33,421$42,351 – $66,842$21,176 – $33,421$42,354 – $54,597
6%$33,422 – $46,394$66,843 – $92,788$33,422 – $46,394$54,598 – $67,569
8%$46,395 – $58,634$92,789 – $117,268$46,395 – $58,634$67,570 – $79,812
9.3%$58,635 – $299,508$117,269 – $599,016$58,635 – $299,508$79,813 – $407,329
10.3%$299,509 – $359,407$599,017 – $718,814$299,509 – $359,407$407,330 – $488,796
11.3% (plus 1% for income over $1,000,000)$359,408 – $599,012$718,815 – $1,198,024$359,408 – $599,012$488,797 – $814,658
12.3% (plus 1% for income over $1,000,000)$599,013+$1,198,025+$599,013+$814,659+

How the Federal Capital Gains Tax Works

The federal government does tax both short- and long-term capital gains. Short-term capital gains are taxed just like any other income:

RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
10%$0 – $11,000$0 – $22,000$0 – $11,000$0 – $15,700
12%$11,001– $44,725$22,001– $89,450$11,001– $44,725$15,701– $59,850
22%$44,726– $95,375$89,451– $190,750$44,726– $95,375$59,851– $95,350
24%$95,376– $182,100$190,751– $364,200$95,376– $182,100$95,351– $182,100
32%$182,101– $231,250$364,201– $462,500$182,101– $231,250$182,101– $231,250
35%$231,251– $578,125$462,501– $693,750$231,251– $346,875$231,251– $578,100

Long-term capital gains, meanwhile, are taxed at either 0%, 15% or 20%, based on total gains. The federal long-term capital gains tax schedule is as follows:

Federal Long-Term Capital Gains Tax Rates

RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
0%$0 – $44,625$0 – $89,250$0 – $44,625$0 – $59,750
15%$44,626 – $492,300$89,251 – $553,850$44,626 – $276,900$59,751 – $523,050

President Joe Biden has proposed raising capital gains tax on top earners. Biden’s proposal would raise it to 39.6%, essentially taxing it as regular income. As of the time of this writing, this proposal has yet to become law.

California’s Overall Tax Picture

California Capital Gains Tax

California is generally considered to be a high-tax state, and the numbers bear that out. There is a progressive income tax with rates ranging from 1% to 13.3%, which are the same tax rates that apply to capital gains. The Golden State also has a sales tax of 7.25%, the highest in the country. With local sales taxes added on, the sales tax rate in some municipalities can climb as high as 10.25%.

Property taxes in California can’t exceed 1% by law. There is no estate tax or inheritance tax.

How to Avoid Capital Gains Taxes

Handing over a chunk of your profit can be painful. Thankfully, there are a few ways that you can reduce the amount of capital gains taxes you will pay after selling an asset.

Choose Long-Term Investments

Capital gains can be classified as either short-term or long-term, each of which has its own tax rates.

Assets that you have held for less than a year are considered short-term. When it comes to earning short-term gains, expect to be taxed at your ordinary tax rate … which can be as high as 37%, depending on your total taxable income.

If you want to avoid that, you should choose long-term investments instead. By holding an investment for a year or more, you will qualify for long-term capital gains tax rates.

Most long-term capital gains will see a tax rate of no more than 15%, though certain assets (like coins and art) can be taxed at a rate up to 28%. Depending on your income, you may even qualify for capital gains tax rates as low as 0%.

Take Advantage of Tax-Deferred Retirement Accounts

Your retirement accounts likely make up a bulk of your savings and future assets. It’s wise to optimize these as best you can by utilizing tax-deferred (and tax-exempt) plans, to save yourself from added capital gains taxes. When contributing to a tax-deferred retirement plan, such as a 401(k) or traditional IRA, you’ll receive a tax deduction on your contributions in the current tax year. This can save you money on your income taxes today, as well as help you to save even more toward the future.

Your money will also continue to grow over time. When you’re finally ready to sell your investments and withdraw, any growth in the account is taxed at your ordinary income rate, rather than being subject to capital gains like other investment accounts.

A tax-exempt account, such as a Roth IRA, doesn’t offer any tax benefits today. However, the money held in this account will grow tax-free until retirement. When you’re ready to use the money, your funds (and growth) can also be withdrawn tax-free, helping you avoid capital gains yet again.

Offset Your Gains With Losses

If you hold a number of different assets, you may be able to offset some of your gains with any applicable losses, allowing you to avoid a portion of your capital gains taxes.

For instance, if you have one investment that is down by $3,000 and another that is up by $5,000, selling both will help you reduce your gains. You would only be subject to capital gains taxes on the difference – or $2,000 – rather than the full $5,000 gain of the second investment.

Another offset strategy is tax-loss harvesting. With this method, you can carry over losses from one tax year into the next, to help offset future gains. Tax loss harvesting only applies if your losses in a given year exceed your total gains.

Bottom Line

California taxes capital gains at the same rate as regular income. In turn, any money earned in a year from investments will simply be added to the person’s taxable income. Californians are also subject to federal capital gains taxes, which vary based on whether the gains are from short- or long-term investments. In short, you’ll want to plan things out when you invest as a resident of California, or you could end up getting hit hard at the state and federal levels.

Investment Tips

California Capital Gains Tax
  • Capital gains taxes can be confusing, and professional advice can be very helpful. Luckily, finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool connects you with up to three vetted financial advisors who serve your area and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • It’s important to think ahead regarding investments. Use SmartAsset’s investment calculator to get a sense of what your portfolio may look like as the years roll on.

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