The Best States for Capital Gains Tax

When you sell an asset like stocks, bonds, or real estate for a profit, that profit is a capital gain. This income is subject to tax at both the federal and state levels. The amount of tax you owe depends on your income and how long you held the asset. The federal government distinguishes between short-term gains on assets held for one year or less and long-term gains on assets held for more than one year.

Short-term gains are taxed at your ordinary federal income tax rate. Long-term gains are taxed at lower federal rates of 0%, 15%, or 20%, depending on your income, which encourages long-term investment. State-level taxation is a separate matter and can significantly impact your total tax bill.

How Do Capital Gains Taxes Work?

Most states with an income tax also tax capital gains, often treating them as regular income. This means if you live in a state with a high income tax rate, you could pay a significant amount of tax on your capital gains on top of what you owe the federal government.

However, state rules vary. Some states have no income tax, meaning they also have no capital gains tax. Others provide special deductions or credits for capital gains income, creating a more favorable tax environment. Understanding these differences is important for managing your investment returns.

States With No Capital Gains Tax

The most tax-friendly states for capital gains are those that do not have a state income tax. As of 2025, these states are:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

While Washington does not have a traditional income tax, it does levy a 7% tax on the sale of certain long-term capital assets, such as stocks and bonds, for gains over $250,000. New Hampshire historically taxed interest and dividend income, but this tax was fully repealed as of 2025, aligning it with the other no-tax states. Tennessee also fully repealed its similar “Hall tax” on investment income in 2021.

States With the Highest Capital Gains Tax Rates

On the other end of the spectrum are states that tax capital gains at high rates. In these states, capital gains are taxed as ordinary income, so the highest marginal income tax rate is what high-earning investors will pay.

• California: Capital gains are taxed as regular income, with a top marginal rate of 13.3%.
• Hawaii: The top income tax rate is 11%, but the state allows a partial exclusion for long-term gains under certain conditions.
• New Jersey: The top income tax rate is 10.75%.
• Oregon: The top income tax rate is 9.9%.
• Minnesota: The top income tax rate is 9.85%.
• New York: The top state income tax rate is 10.9%, and New York City residents pay an additional local income tax.
• Vermont: The top income tax rate is 8.75%.
• District of Columbia: The top income tax rate is 10.75%.

States With Special Capital Gains Tax Breaks

Some states offer special tax breaks for certain types of capital gains rather than eliminating the tax entirely. These provisions can reduce the effective tax rate on investment profits.

• Arizona: Provides a 25% exclusion for long-term capital gains from assets acquired after 2011.
• Arkansas: Offers a 50% exclusion for capital gains, provided the gains do not exceed $10 million.
• Montana: Provides a tax credit equal to 2% of net capital gains.
• New Mexico: Allows a deduction for long-term capital gains, which can exempt up to 40% of the gain from state taxes.
• North Dakota: Offers a 40% exclusion for long-term capital gains.
• South Carolina: Provides a 44% exclusion for net long-term capital gains.
• Wisconsin: Allows a 30% exclusion for long-term capital gains.

How to Minimize Your Capital Gains Tax Bill

Beyond moving, several strategies can help minimize your capital gains tax liability, regardless of where you live.

• Tax-Loss Harvesting: This strategy involves selling investments at a loss to offset gains realized from selling other investments at a profit. If your losses exceed your gains, you can use up to $3,000 per year to offset your ordinary income.
• Use Tax-Advantaged Retirement Accounts: Investing through accounts like a 401(k) or an IRA allows your investments to grow tax-deferred or tax-free. You won’t pay capital gains taxes on sales made within these accounts.
• Gift Appreciated Assets: You can gift appreciated assets to individuals in lower tax brackets, such as children or other family members. When they sell the asset, the gain will be taxed at their lower rate.
• Invest in Opportunity Zones: This program provides tax incentives for investing in economically distressed communities. By investing capital gains into an Opportunity Fund, you can defer and potentially reduce your tax liability.
• Spread Gains Over Multiple Years: If you have a large anticipated gain, consider structuring the sale to spread the income over several years. This can help you avoid being pushed into a higher tax bracket in a single year.

Conclusion

State-level taxes can have a substantial effect on your investment returns. While moving to a no-tax state is one option, it is not practical for everyone. Fortunately, strategies like tax-loss harvesting and using tax-advantaged accounts can help reduce your tax burden. Consulting with a financial advisor or tax professional can help you create a personalized strategy that fits your financial situation.