Capital gains tax can catch many California residents by surprise, especially when it comes time to file their returns. Whether you’re selling stocks, real estate, or other investments, understanding how California’s capital gains tax works and how it differs from federal tax is essential for smart financial planning.
What is California’s Capital Gains Tax?
At its core, the capital gains tax is a tax on the profit you make from selling an asset. This could include stocks, bonds, real estate, or other types of investments. The difference between the purchase price (or basis) and the sale price is your capital gain.
Unlike many other states, California does not have a separate capital gains tax rate. Instead, capital gains are treated as regular income and taxed at the state’s ordinary income tax rates, which are among the highest in the nation.
How California Capital Gains Tax Differs from Federal Tax
On the federal level, capital gains receive preferential tax treatment. Long-term capital gains (assets held for more than one year) are taxed at lower rates—0%, 15%, or 20%—depending on your taxable income. Short-term capital gains (held for less than one year) are taxed as ordinary income, similar to California’s approach.
California, however, taxes all capital gains as ordinary income. This means that your gains can be taxed at rates as high as 13.3%, the highest state income tax rate, on top of federal taxes. This makes California’s capital gains tax especially important to understand for residents seeking to minimize their tax burden.
Current California Capital Gains Tax Rates
California’s income tax brackets are progressive, meaning the rate you pay increases as your income rises. Since capital gains are taxed as regular income, the tax you owe depends on your total taxable income, including gains.
Here is a simplified overview of California’s 2025 income tax rates (subject to change each year):
| Taxable Income (Single Filers) | Tax Rate (%) |
| Up to $10,000 | 1% |
| $10,001 – $25,000 | 2% |
| $25,001 – $45,000 | 4% |
| $45,001 – $60,000 | 6% |
| $60,001 – $300,000 | 8% |
| $300,001 – $500,000 | 9.3% |
| $500,001 – $1,000,000 | 10.3% |
| $1,000,001 – $5,000,000 | 11.3% |
| Over $5,000,000 | 13.3% |
Note: These brackets apply to total taxable income, including capital gains.
Comparison with Federal Capital Gains Tax Rates
At the federal level, long-term capital gains tax rates are typically much lower than California’s top rates:
- 0% for taxpayers in the lowest income brackets
- 15% for most middle-income taxpayers
- 20% for the highest earners
Because California treats all capital gains as ordinary income, a high-income California resident may face combined tax rates exceeding 33% to 43% when adding federal and state taxes—a significant tax burden.
Key Rules and Regulations for California Capital Gains Tax
Short-Term vs. Long-Term Capital Gains
While the federal government distinguishes between short-term and long-term capital gains, with different rates, California does not. For California tax purposes, all capital gains are taxed at the same rate as your ordinary income, regardless of how long you held the asset.
Special Rules for Real Estate and Primary Residence
California conforms mostly with federal rules on the primary residence exclusion. When you sell your main home, you may exclude up to $250,000 ($500,000 if married filing jointly) of capital gains from taxation if you meet the ownership and use tests.
This is an important tax break, but if you have a rental or second property, the gains from those sales are fully taxable at your ordinary state income rates.
Reporting Requirements and Deadlines
Capital gains must be reported on your California state income tax return using Schedule D (California Capital Gains and Losses) and Form 540 (or 540NR if you are a non-resident). Federal reporting uses Schedule D and Form 8949.
Deadlines generally align with federal tax deadlines:
- April 15 (or the next business day) for filing tax returns
- Extensions are available, but tax payments must be estimated and paid by April 15
Strategies to Reduce Your California Capital Gains Tax
Given California’s high tax rates on capital gains, employing smart strategies can save you thousands of dollars.
Tax Loss Harvesting
This strategy involves selling investments at a loss to offset your capital gains. Losses reduce your taxable gains dollar-for-dollar, and if your losses exceed your gains, you can deduct up to $3,000 against ordinary income annually, with excess losses carried forward.
Using Primary Residence Exclusion
Take full advantage of the $250,000/$500,000 exclusion when selling your primary home. Ensure you meet the ownership and use tests, living in the home for at least two of the last five years, to qualify for this exemption.
1031 Exchanges for Investment Properties
Under Internal Revenue Code Section 1031, you can defer paying capital gains tax on investment properties if you reinvest the proceeds in a similar property within a specified timeframe. This strategy is powerful for real estate investors to defer taxes while growing their portfolio.
Timing Your Sales and Gains
Sometimes, timing your asset sales to align with years of lower income can reduce your overall tax liability. For example, selling investments in a year when your income is lower might push you into a lower tax bracket.
Charitable Donations and Other Deductions
Donating appreciated assets to qualified charities can eliminate capital gains tax on those assets while providing a charitable deduction. Consult a tax advisor to maximize these benefits.
How to File and Pay Your California Capital Gains Tax
Forms and Documentation Required
- Schedule D (California Capital Gains and Losses): Reports your capital gains and losses
- Form 540: California Resident Income Tax Return
- Keep detailed records of purchase dates, costs, sale dates, sale prices, and related expenses to calculate gains accurately.
Payment Options and Deadlines
California state taxes are due by April 15. Payments can be made online via the Franchise Tax Board (FTB) website, by mail, or through withholding (for some sellers).
Working with a Tax Professional
Given the complexity and high stakes of capital gains tax, consulting a CPA or tax advisor who specializes in California taxes is highly recommended. They can ensure compliance, optimize deductions, and help you plan future transactions wisely.
Conclusion
Understanding the California capital gains tax system is crucial for anyone investing or selling assets in the state. Because California taxes capital gains as ordinary income, the stakes are high, but so are the opportunities for smart tax planning.
By applying strategies like tax loss harvesting, leveraging the primary residence exclusion, and considering 1031 exchanges, you can reduce your tax liability significantly. Always keep accurate records, file timely, and consider professional advice to navigate the complexities effectively.
Stay informed, plan, and make your money work smarter, not harder. If you found this guide helpful, share it with others and feel free to leave your questions or experiences in the comments below!
Common Questions About California Capital Gains Tax
Q: Does California tax capital gains differently from federal?
A: Yes, California taxes all capital gains as ordinary income, without the federal preferential rates for long-term gains.
Q: Can I exclude capital gains from selling my home?
A: Yes, up to $250,000 ($500,000 if married filing jointly), if you meet residency and ownership requirements.
Q: What is tax loss harvesting?
A: Selling investments at a loss to offset gains and reduce taxable income.
Q: Can I defer capital gains taxes on investment property sales?
A: Yes, through a 1031 exchange if you reinvest in a like-kind property within the IRS timeline.Q: When are California capital gains taxes due?
A: Typically, on April 15, along with your annual state income tax return.
Written by: Thomas Brooks
Published: November 10, 2025