Investors must pay capital gains taxes on the income they make as a profit from selling investments or assets. The federal government taxes long-term capital gains at the rates of 0%, 15% and 20%, depending on filing status and income. And short-term capital gains are taxed as ordinary income. Some states will also tax capital gains. A financial advisor could help you figure out your tax liability and create a tax plan to maximize your investments.
An Overview of Capital Gains Taxes
Capital gains vary depending on how long an investor had owned the asset before selling it. Long-term capital gains come from assets held for over a year. Short-term capital gains come from assets held for under a year.
Based on filing status and taxable income, long-term capital gains for tax year 2022 will be taxed at 0%, 15% and 20%. Short-term gains are taxed as ordinary income based on your personal income tax bracket. After federal capital gains taxes are reported through IRS Form 1040, state taxes may also be applicable.
States That Don’t Tax Capital Gains
The following states do not tax capital gains:
- New Hampshire
- South Dakota
States That Tax Capital Gains
A majority of U.S. states have an additional capital gains tax rate between 2.9% and 13.3%. The rates listed below are for 2022, which are taxes you’ll file in 2023.
States With the Highest Capital Gains Tax Rates
The states with the highest capital gains tax are as follows:
California taxes capital gains as ordinary income. The highest rate reaches 13.3%
Hawaii taxes capital gains at a lower rate than ordinary income. The highest rate reaches 7.25%.
Taxes capital gains as income and the rate reaches 8.53%.
Taxes capital gains as income. The rate reaches 7.15% at maximum.
Taxes capital gains as income and the rate reaches a maximum of 9.85%.
New Jersey taxes capital gains as income and the rate reaches 10.75%.
New York taxes capital gains as income and the rate reaches 8.82%.
Oregon taxes capital gains as income and the rate reaches 9.9%.
Vermont taxes short-term capital gains as income, as well as long-term capital gains that a taxpayer holds for up to three years. They are allowed to deduct up to 40% of capital gains (at a maximum of $350,000 and not exceeding 40% of federal taxable income) on long-term assets held over three years. The capital gains tax rate reaches 8.75%.
Wisconsin taxes capital gains as income. Long-term capital gains can apply a deduction of 30% (or 60% for capital gains from the sale of farm assets). The capital gains tax rate reaches 7.65%.
Capital Gains Tax Rates in Other States
As for the other states, capital gains tax rates are as follows:
Taxes capital gains as income and the rate reaches 5%
Taxes capital gains as income and the rate reaches 4.5%
Taxes capital gains as income and the rate reaches around 5.50%.
Colorado taxes capital gains as income and the rate reaches 4.55%.
Connecticut’s capital gains tax is 6.99%.
Taxes capital gains as income and the rate reaches 6.60%.
Taxes capital gains as income and the rate reaches 5.75%.
Idaho axes capital gains as income. The rate reaches 6.93%.
Taxes capital gains as income and the rate is a flat rate of 4.95%.
Taxes capital gains as income and the rate is a flat rate of 3.23%.
Kansas taxes capital gains as income. The rate reaches 5.70% at maximum.
Taxes capital gains as income. The rate is a flat rate of 5%.
Taxes capital gains as income. The rate reaches 4.25%.
Taxes capital gains as income and the rate reaches 5.75%.
Taxes capital gains as income. Long-term capital gains are usually taxed at a flat rate of about 5% but there are some types of capital gains that the state taxes at 12%.
Taxed as income and at a flat rate of 4.25%.
Taxed as income and reaches 5%.
Taxed as income and the rate reaches 5.4%.
Taxed as income and the highest income tax rate is 6.90%, but with a 2% capital gains credit, this rate is technically 4.9%.
Taxed as income and the rate reaches 6.84%.
The state taxes capital gains as income (allowing a deduction of 40% of capital gains income or $1,000, whichever is higher) and the rate reaches 5.9%.
Taxed as income and at a flat rate of 4.99%.
Taxed as income (with a deduction allowed of 40% of capital gains income) and the rate reaches 2.90%.
Taxed as income and the rate reaches 4.80%.
Taxed as capital gains and the rate reaches 4.75%. There is a 100% capital gains deduction available for income from particular kinds of investments.
Taxed as capital gains income at a flat rate of 3.07%.
Taxed as capital gains income and reaching 5.99%.
South Carolina taxes capital gains as income (with a 44% deduction available on long-term gains) and the rate reaches 7%.
Taxes capital gains as income at a flat rate of 4.95%.
Virginia taxes capital gains as income with the rate reaching 5.75%.
Washington State taxes capital gains at a rate of 7%. However, real estate, retirement savings, livestock and timber are exempt from this tax.
The state taxes capital gains as income. The rate reaches 6.5%.
Capital gains taxes can be tricky when investing, especially when you have to figure out both federal and state taxes. Be sure to understand whether your state taxes capital gains – and to what extent – before filing your tax return.
Tips for Navigating Tax Planning
- Need help finding a financial advisor? Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.
- You might be interested in signing up for a robo-advisor. Many robo-advisors offer tax-loss harvesting, which sells investments that are hurting your portfolio and helps offset what you earn from the gains. Robo-advisors aren’t necessarily right for everyone, but if you’re starting your investment journey or you don’t have complicated assets, you may want to give it a try. If you’re unsure, find one that offers you the chance to talk to a financial professional if you have questions about your specific needs. Not all robo-advisors offer this perk, but some do, usually for a fee.
Photo credit: ©iStock.com/Doucefleur, ©iStock.com/deepblue4you, ©iStock.com/undrey