How Much Are Capital Gains in California?

A capital gain is the profit realized from the sale of a capital asset, which includes items like stocks, bonds, and real estate. When you sell an asset for more than you originally paid for it, the difference is considered a gain and is subject to taxation. Both the federal government and the state of California have systems for taxing these gains, but their methods differ significantly. Understanding how California treats these profits is a component of managing your overall tax liability within the state.

California’s Capital Gains Tax Treatment

Unlike the federal tax system, California does not offer a different, lower tax rate for long-term capital gains. The state treats all capital gains, whether from an asset held for a few months or many years, as ordinary income. This means the profit from selling an asset is added to your other income, such as wages or business earnings, and taxed at your regular marginal income tax rate. California’s income tax rates are progressive, meaning the rate increases as income rises.

The state’s tax brackets range from 1% to 12.3%. For high-income earners, there is also a 1% Mental Health Services Tax on income that exceeds $1,000,000, which can affect the total tax paid on a large capital gain. For example, if a taxpayer has $150,000 in wage income and realizes a $50,000 capital gain, their total taxable income for California purposes becomes $200,000. This combined amount is then subjected to the state’s graduated income tax rates, and the additional gain could push the taxpayer into a higher tax bracket.

The 2025 marginal tax rates for a single filer in California are as follows:

• Income up to $11,179 is taxed at 1%.
• Income from $11,180 to $26,487 is taxed at 2%.
• Income from $26,488 to $41,794 is taxed at 4%.
• Income from $41,795 to $57,998 is taxed at 6%.
• Income from $57,999 to $73,346 is taxed at 8%.
• Income from $73,347 to $374,537 is taxed at 9.3%.
• Income from $374,538 to $449,443 is taxed at 10.3%.
• Income from $449,444 to $749,074 is taxed at 11.3%.
• Income over $749,074 is taxed at 12.3%.

This structure means that the exact amount of California tax on a capital gain is directly tied to a taxpayer’s total income for the year. A larger gain or higher existing income will result in a greater tax liability on that profit.

Calculating Your California Capital Gain

The formula for this calculation is the asset’s sale price minus its adjusted basis. The sale price is straightforward, but the adjusted basis requires careful calculation to ensure you are not paying more tax than necessary.

The adjusted basis is the asset’s original cost, modified by certain events during the period of ownership. For real estate, the basis starts with the purchase price and is increased by the cost of capital improvements, such as a room addition or a new roof. It is then reduced by any depreciation claimed if the property was used for rental purposes. For example, if you bought a property for $400,000, spent $50,000 on a major renovation, and claimed $20,000 in depreciation, your adjusted basis would be $430,000.

When dealing with stocks or other securities, the initial basis is the purchase price plus any transaction fees or commissions paid to execute the trade. If you acquired shares of the same stock at different times and prices, you must identify which specific shares are being sold to determine the correct basis. This can be done using methods like “first-in, first-out” (FIFO) or by specifically identifying the shares sold.

Federal vs California Capital Gains Taxation

The distinction between federal and California tax treatment of capital gains is substantial. At the federal level, the duration of ownership is a factor. Gains from assets held for one year or less are considered short-term and are taxed at the same ordinary income tax rates as your wages, which range from 10% to 37%.

The main divergence occurs with long-term capital gains, which are profits from assets held for more than one year. The federal government taxes these gains at rates of 0%, 15%, or 20%, depending on your total taxable income. For 2025, a single filer with taxable income up to $49,230 would pay 0% on long-term gains, while those with income between $49,231 and $541,450 would pay 15%. The 20% rate applies to those with income above that threshold.

Higher-income taxpayers may also be subject to the Net Investment Income Tax (NIIT) at the federal level. This is an additional 3.8% tax on investment income, including capital gains, for individuals with a modified adjusted gross income exceeding $200,000 for single filers or $250,000 for those married filing jointly. This federal surtax is separate from the standard capital gains tax rates. California does not have a separate NIIT, but its higher marginal income tax rates can result in a comparable or even higher overall tax burden on investment profits.

Reporting Capital Gains in California

Reporting capital gains begins with your federal return. You must calculate gains and losses on federal Form 1040, Schedule D, detailing each transaction. Once the federal return is complete, this information is transferred to your California tax return, Form 540. You will use the figures from your federal Schedule D to complete California’s Schedule D (540), making any adjustments for differences between federal and state law.

The net gain from California’s Schedule D (540) is reported on the designated line of Form 540. This amount is combined with your other sources of income to determine your total California taxable income, which is then used to calculate your final tax liability.

Special California Provisions

While California’s general approach is to tax capital gains as ordinary income, there are specific provisions that can alter this treatment in certain situations. One notable area involves Qualified Small Business Stock (QSBS). At the federal level, the tax code allows for an exclusion of up to 100% of the capital gain from the sale of QSBS held for more than five years.

California law, however, does not conform to this federal exclusion. The state no longer offers any exclusion or deferral for gains from the sale of QSBS. Due to this difference, a gain from QSBS that is tax-free for federal purposes is fully taxable as ordinary income in California, creating a divergence in tax outcomes for investors.