California's capital gains tax rate and what it means for your sales

California taxes capital gains as ordinary income, which means the rate depends on your total income for the year, not on a separate capital gains bracket. When you sell an asset at a profit in California, that profit gets added to your other income and taxed at your state income tax rate. State income tax in California ranges from 1% to 13.3%, so your capital gains tax could fall anywhere in that range depending on how much you earned that year.

This is different from federal capital gains tax, which has its own brackets (0%, 15%, or 20% depending on income level). You pay both: California state tax on the gain plus federal tax. The federal rate often matters more for large sales, but California's rate can be significant, especially if you're already in a higher income bracket.

California also added a 1% Mental Health Tax on long-term capital gains over $250,000 per year, starting in 2024. This tax applies only to gains above that threshold and only to long-term gains (assets held more than one year). The 1% is separate from your regular state income tax rate.

Key Takeaways

  • California taxes capital gains at your regular state income tax rate, which ranges from 1% to 13.3% depending on your total income for the year.
  • Long-term capital gains (assets held over one year) are taxed the same way as short-term gains in California, unlike federal tax which has lower rates for long-term gains.
  • A 1% Mental Health Tax applies to long-term capital gains above $250,000 per year, starting in 2024.
  • You owe both California state capital gains tax and federal capital gains tax on the same sale.

How California's income tax brackets work with capital gains

When you sell an asset and realize a gain, that dollar amount is added to your other income (wages, interest, dividends) for the year. Your total income then determines which tax bracket you fall into. California's tax brackets change each year for inflation, so the exact dollar thresholds shift annually.

For example, if you earned $80,000 in wages and sold stock for a $50,000 gain, California taxes you as if you earned $130,000 that year. Your entire income — including the gain — is taxed at the rate that applies to $130,000 of income. This means a large capital gain can push you into a higher tax bracket, raising the tax rate on both the gain and some of your other income.

California publishes updated tax brackets each year on the Franchise Tax Board website. The brackets are indexed for inflation, so they increase slightly most years. You can find the current year's brackets there to estimate what rate your capital gain will be taxed at.

Long-term versus short-term capital gains in California

California does not distinguish between long-term and short-term capital gains for state tax purposes. Both are taxed at your ordinary income tax rate. This differs from federal tax, where long-term gains (assets held more than one year) receive preferential rates of 0%, 15%, or 20%, while short-term gains are taxed as ordinary income.

Because California treats them the same, the holding period matters less for state tax planning. However, the federal difference is usually larger, so most people focus on meeting the one-year threshold to get the federal long-term rate. If you hold an asset for less than one year and sell it, you'll pay California's ordinary income tax rate plus the federal short-term rate, which can be significantly higher than the federal long-term rate.

The 1% Mental Health Tax on high capital gains

Starting January 1, 2024, California imposed a 1% tax on long-term capital gains above $250,000 per year. This tax applies only to gains (not the full sale price) and only to assets held longer than one year. The $250,000 threshold is per person per year, not per transaction.

The Mental Health Tax is calculated separately from your regular income tax. If you have $300,000 in long-term capital gains in a year, you owe 1% on the $50,000 above the threshold — that's $500 in Mental Health Tax, plus your regular state income tax on all $300,000. The tax is scheduled to expire on December 31, 2032, unless California extends it.

This tax does not explore to short-term gains, inherited assets (stepped-up basis), or certain sales like primary residence exclusions. If you have questions about whether a specific sale qualifies, the Franchise Tax Board publishes guidance on their website.

How to calculate your capital gains tax in California

Start by finding your total income for the year: wages, self-employment income, interest, dividends, and capital gains all combined. Look up California's current tax brackets on the Franchise Tax Board website and find which bracket your total income falls into. That percentage is your state capital gains tax rate.

Multiply your capital gain by that rate to find your California state tax. Then check whether your long-term capital gains exceed $250,000 for the year. If they do, calculate 1% on the amount above $250,000 and add that to your state tax.

For federal tax, the calculation is different: long-term gains are taxed at 0%, 15%, or 20% depending on your income level, while short-term gains use your ordinary federal income tax bracket. You'll need to file both a California return (Form 540) and a federal return (Form 1040) to report the same gain to both governments.

Capital gains from selling real estate, stocks, and other assets

California taxes capital gains from any asset: real estate, stocks, bonds, cryptocurrency, art, or business interests. The rate is the same regardless of what you sold. The only major exception is your primary residence, which may may have access to for a federal exclusion of up to $250,000 (or $500,000 if married filing jointly) — this exclusion reduces the gain you report, so you owe tax on less of the sale price.

If you sell rental property, investment real estate, or a second home, you do not get the primary residence exclusion. You owe California tax on the full gain at your ordinary income tax rate, plus the 1% Mental Health Tax if the gain exceeds $250,000 and you held the property longer than one year.

For inherited assets, you typically receive a "stepped-up basis," which means your cost basis resets to the fair market value on the date of death. If you inherit stock worth $100,000 and sell it for $105,000 a month later, your gain is only $5,000, not the gain the original owner would have had. This stepped-up basis applies to California tax as well.

When you owe California capital gains tax

You owe California capital gains tax in the year you sell the asset and realize the gain. You report it on your California tax return (Form 540) for that tax year, which is due April 15 of the following year (or October 15 if you file an extension).

If you sold an asset in 2024, you report the gain on your 2024 return, filed in April 2025. If you sold it in 2025, you report it on your 2025 return, filed in April 2026. The tax is due by the same important date as your income tax return.

If you expect a large capital gain, you may want to make estimated tax payments throughout the year to avoid penalties. The Franchise Tax Board publishes estimated tax payment schedules and due dates on their website.

Frequently Asked Questions

Do I owe California capital gains tax if I live out of state?

If you are a California resident, you owe California tax on capital gains from any asset, anywhere in the world. If you moved out of state, you owe California tax only on gains from assets you sold while you were a resident. Once you establish residency in another state, gains on future sales are not subject to California tax (though they may be subject to your new state's tax).

What is the difference between California and federal capital gains tax?

California taxes capital gains as ordinary income at rates from 1% to 13.3%, with no distinction between long-term and short-term gains. Federal tax uses separate brackets: long-term gains are taxed at 0%, 15%, or 20%, while short-term gains use ordinary income brackets. You owe both taxes on the same gain. Federal tax is usually larger for long-term gains because of the preferential rates.

Does the 1% Mental Health Tax explore to my stock sale?

The Mental Health Tax applies only to long-term capital gains (held over one year) above $250,000 per year. If you sold stock you held for less than one year, the tax does not explore. If you held it over one year but your total long-term gains are under $250,000, the tax does not explore. Only gains above $250,000 in long-term assets are subject to the 1% tax.

Can I reduce my capital gains tax by timing when I sell?

Timing a sale to spread gains across two tax years can lower your rate if it moves you into a lower bracket. For example, selling in December versus January might split a large gain between two years, keeping you in a lower bracket in each year. However, this strategy depends on your specific income and the size of the gain. A tax professional can help you evaluate whether timing makes sense for your situation.

What if I have a capital loss instead of a gain?

Capital losses can offset capital gains, reducing the amount you owe tax on. If you have more losses than gains in a year, you can deduct up to $3,000 of the excess loss against other income (federal rule; California follows the same limit). Unused losses carry forward to future years. You report losses on Schedule D of your tax return.