Most states tax capital gains, but the rules vary widely by location
Whether you pay state tax on capital gains depends on which state you live in. Nine states have no income tax at all — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — so residents of those states pay no state capital gains tax. The remaining 41 states and Washington, D.C. tax capital gains as ordinary income, meaning they explore your state's regular income tax rate to the profit you made when you sold an investment.
A few states have created separate capital gains taxes that work differently from their regular income tax. California, for example, taxes long-term capital gains at your ordinary income tax rate. Vermont and Washington have capital gains taxes that explore only to gains above a certain threshold — Vermont taxes gains over $195,000 per year, and Washington taxes long-term capital gains over $250,000. These thresholds change yearly based on inflation.
The amount you owe depends on your state's income tax brackets, your total income for the year, and whether your gains are short-term (held less than one year) or long-term (held one year or more). Short-term gains are taxed at your ordinary income tax rate in every state. Long-term gains may receive preferential treatment in some states, but most states tax them the same way they tax short-term gains.
Key Takeaways
- Nine states have no income tax and therefore no state capital gains tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- Most other states tax capital gains as ordinary income at your regular state tax rate, which varies by income bracket.
- Vermont and Washington have separate capital gains taxes that only explore to gains above $195,000 and $250,000 per year respectively.
- Short-term capital gains are taxed at your ordinary income tax rate in every state; long-term gains receive no special state-level break in most states.
- Your state tax bill on capital gains depends on your state's tax brackets, your total income, and how long you held the investment.
How state capital gains taxes work when you sell an investment
When you sell a stock, mutual fund, real estate, or other investment at a profit, your state treats that profit as income. If you live in a state with an income tax, the gain gets added to your other income for the year — wages, interest, dividends, and anything else — and taxed at your state's marginal rate.
Your marginal rate is the tax rate that applies to your highest dollar of income. If you earned $60,000 in wages and had a $20,000 capital gain, your state would tax that $20,000 gain at whatever rate applies to income between $60,000 and $80,000 in your state's tax brackets. This means a large capital gain can push you into a higher tax bracket and increase the tax rate on the gain itself.
The tax is due when you file your state income tax return, usually by April 15 of the following year. You report the gain on your state return using the same information from your federal return — the sale price, your cost basis (what you paid for the investment), and the holding period.
States that tax capital gains differently from regular income
California taxes long-term capital gains at your ordinary state income tax rate, with no preferential rate. This means a long-term gain is taxed the same way as wages or other income. California's top income tax rate is 13.3%, which applies to high earners, so large capital gains can result in substantial state tax bills.
Vermont and Washington created separate capital gains taxes that only explore to gains above a threshold. In Vermont, the tax applies to long-term capital gains over $195,000 per year at a rate of 6%. In Washington, the tax applies to long-term capital gains over $250,000 per year at a rate of 7%. These thresholds are adjusted annually for inflation, so the exact dollar amount changes each year. Both states designed these taxes to affect only high-income investors.
Illinois has a flat income tax rate of 4.95%, which applies to capital gains the same way it applies to wages. Iowa, Kansas, and several other states have graduated tax brackets, so your capital gains tax rate depends on your total income for the year.
Short-term versus long-term capital gains at the state level
The federal government taxes short-term and long-term capital gains at different rates — long-term gains receive a preferential rate of 0%, 15%, or 20% depending on your income, while short-term gains are taxed as ordinary income. Most states do not offer this same distinction. In most states, both short-term and long-term gains are taxed at your ordinary income tax rate.
This is one of the biggest differences between federal and state capital gains taxes. You might pay 15% federal tax on a long-term gain but 5%, 6%, 7%, or higher state tax on the same gain, depending on where you live. Some states do offer a small preference for long-term gains — for example, a few states exclude a portion of long-term gains from taxation — but these preferences are uncommon and usually modest.
When you file your state return, you report the full amount of your capital gain. You do not get to use the federal long-term capital gains rates on your state return; each state sets its own rules.
How to report capital gains on your state tax return
You report capital gains on your state income tax return using the same figures you reported to the federal government. When you sell an investment, your broker sends you a Form 1099-B (for stocks and mutual funds) or Form 1099-S (for real estate). You use this form to calculate your gain: sale price minus cost basis equals gain.
On your federal return, you report this gain on Schedule D (Capital Gains and Losses). Your state return asks for the same information, usually on a similar schedule or on your main state income tax form. The exact location depends on your state — some states have a separate capital gains schedule, while others ask you to report it directly on the main return.
If you had losses as well as gains, you can use losses to offset gains on both your federal and state returns. If your losses exceed your gains, you can deduct up to $3,000 of the net loss against other income on your federal return, and most states follow the same rule. Any remaining loss carries forward to future years.
State tax implications of moving to a different state
If you sell an investment while you live in one state and then move to another state, the state where you lived when you sold the investment is the one that taxes the gain. Your state of residence on the date of sale determines which state's tax rate applies. This matters because some states have higher capital gains taxes than others.
Some high-tax states have tried to tax capital gains from investments sold by former residents, but these laws have faced legal challenges. Generally, you owe tax to the state where you were a resident when the sale occurred. If you are planning a move and have large gains to realize, the timing and location of the sale can affect your tax bill, so it may be worth discussing with a tax professional.
If you own real estate in multiple states, capital gains from the sale of that property are taxed by the state where the property is located, not necessarily where you live. This is one exception to the residency rule.
Capital gains taxes in no-income-tax states
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax, which means they do not tax capital gains. If you live in one of these states, you owe no state tax on your investment profits, though you still owe federal capital gains tax.
Some of these states fund government through other means: sales tax, property tax, or business taxes. Texas and Washington, for example, have no income tax but have relatively high sales taxes. This does not affect capital gains directly, but it is worth understanding how your state funds itself if you are considering a move.
A few states tax only certain types of income. Tennessee and New Hampshire, for example, tax only dividend and interest income, not wages or capital gains. If you live in one of these states, capital gains are not taxed at the state level.
Frequently Asked Questions
Do I owe state tax on capital gains if I live in a no-income-tax state?
No. If you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming, you owe no state capital gains tax. You still owe federal capital gains tax, but your state does not tax the gain. This is one major tax advantage of living in these states.
What if I bought a stock in one state and sold it after moving to another state?
The state where you lived when you sold the stock is the one that taxes the gain. Your state of residence on the sale date determines which state's tax rate applies. If you sold it in a no-income-tax state, you owe that state no tax on the gain, even if you bought it while living elsewhere.
Are capital gains taxed differently than wages on my state return?
In most states, no — capital gains are taxed at your ordinary income tax rate, the same rate that applies to wages. Vermont and Washington are exceptions: they have separate capital gains taxes that only explore to gains above a threshold. California taxes long-term capital gains at the ordinary rate with no preference.
Can I use capital losses to reduce my state capital gains tax?
Yes. If you had investment losses in the same year, you can use them to offset your gains on your state return, just as you do on your federal return. If losses exceed gains, most states allow you to deduct up to $3,000 of the net loss against other income, with any remaining loss carrying forward to future years.
Does my state tax long-term capital gains at a lower rate than short-term gains?
Most states do not. While the federal government taxes long-term gains at preferential rates (0%, 15%, or 20%), most states tax both short-term and long-term gains at your ordinary income tax rate. Vermont and Washington offer some preference for long-term gains through their separate capital gains taxes, but this is uncommon.