Capital gains tax plays a crucial role in shaping financial decisions. This is especially true for property owners, investors, and entrepreneurs in key states like California.
If you are among individuals with a lot of assets, then the puzzle is often how to handle capital gains taxes.
This form of taxes is what California residents are dealing with.
The issue is California treats all capital gains taxes as ordinary income, which often results in higher tax bills than if it would have approached it like the federal tax system.
So, if you are selling your stocks, real estate, or any other valuable assets in California, then you have to understand how California capital gains tax brackets work. Don’t worry, though, if you don’t know it yet.
This guide will break down the current tax brackets, compare them with state and federal states, and finally outline strategies to mitigate capital gains taxes in California.
But before we do that, let’s first understand what capital gains taxes are from two perspectives: the federal system and the California system.
What Are Capital Gains Taxes?
These are taxes on profits made from selling an asset for more than the one you paid for. So real estate, businesses, stocks, and other investments are all subject to capital gains tax.
At the federal level, capital gains are usually categorized into two main types depending on how long these assets were held before the sale. The types are
Short-term capital gains
These are assets that are held for less than a year. These gains are usually taxed as regular income in your income tax bracket. In other words, they are treated just like your salary or wages.
Long-term capital gains
These are for long-term assets that are usually held for more than a year.
They attract lower tax rates ranging from 0% to 20%, depending on the income benefits of these gains.
Unfortunately, California takes a different approach to these. We will discuss more about this in the next sections.
California’s Approach to Capital Gains Taxes and Its Implications
As you may have known already, California doesn’t follow the federal model of offering lower tax rates on long-term gains.
The state treats all capital gains, regardless of how long you have held them, as regular income.
You should also note that California’s tax system is progressive, with the rate rising up with your income: 12.3% for the highest earners and 1% for the lowest earners.
Apart from this, there is a 1% surcharge on earnings above $1 million, thus raising the top effective rate to 13.3%.
The implication of this taxation system is substantial for anyone who earns lots in terms of capital gains.
In fact, it can make people pay into higher brackets, raising their overall tax they pay. That is why high-net-worth individuals should be aware of this taxation framework.
Before we look at the main difference between California’s capital tax regime and the federal tax system with regard to capital gains, let’s look at California capital gains tax brackets.
This will help us understand the implications.
2025 California Income Tax Brackets.
Since California treats capital gains just like your ordinary income, we will focus more on the income tax brackets instead of California capital gains tax brackets.
With that cleared out, it is also important to understand that the state uses a progressive tax system.
What it means is that the rate of tax increases as your income increases. The tax brackets and rates look like this:
| Taxable Income | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| $0 – $10,412 | 1% | 1% | 1% | 1% |
| $10,413 – $49,223 | 2% | 2% | 2% | 2% |
| $49,224 – $62,797 | 4% | 4% | 4% | 4% |
| $62,798 – $322,499 | 6% | 6% | 6% | 6% |
| $322,500 – $414,999 | 9.3% | 9.3% | 9.3% | 9.3% |
| $415,000 – $1,000,000 | 10.3% | 10.3% | 10.3% | 10.3% |
| $1,000,001 – $2,000,000 | 12.3% | 12.3% | 12.3% | 12.3% |
| Over $2,000,000 | 13.3% | 13.3% | 13.3% | 13.3% |
Things to note from the above table are
- Joint filers usually face double the income thresholds when compared to single filers.
- There is a 1% mental health service tax that applies to all income above $1 million, which raises the top marginal rate to 13.3%.
Comparison of 2025 California Capital Gains Tax Brackets and the Federal Capital Gains Taxes
Unlike California, the federal government treats short-term and long-term capital gains differently. It also uses a different tax rate depending on how long you have held your assets:
For capital gains earned from short-term assets, you will pay the gains as your ordinary income tax. What it means is that it will be taxed at the same tax bracket as your salaries and wages.
For assets that you have for more than one year before selling them, they are taxed separately.
In most cases, they enjoy lower preferential tax rates, which are significantly less than the tax on short-term capital gains or your ordinary income.
Long-term capital gains usually attract a tax rate of 15%. The rate could rise up to 20% for higher incomes. Similarly, those with lower incomes can attract a tax rate of 0%.
Here is a table that shows the comparison of California capital gains tax brackets against federal capital gains tax brackets.
| Income Level | Federal Long-Term Capital Gains Tax | Net Investment Income Tax | California Capital Gains Tax | Total Tax Rate |
| $100,000 | 15% | 0% | 6% | 21% |
| $250,000 | 15% | 3.8% | 9.3% | 28.1% |
| $500,000 | 20% | 3.8% | 9.3% | 33% |
| $1,000,000 | 20% | 3.8% | 12.3% | 37.1% |
| $2,000,000 | 20% | 3.8% | 13.3% | 38.1% |
Note that California is strict about taxing capital gains. That means you should do tax planning in advance to mitigate where possible.
Typically, holding investments for the long term to benefit from federal tax breaks, using a loss to offset gains, or even using tax-advantaged accounts are just a few strategies to minimize your tax burdens.
And if you have lots of assets, you may need to consult a tax professional who understands the ins and outs of California capital gains tax brackets.
Strategies to Mitigate Capital Gains Taxes in California
To minimize capital gains taxes, you should lay down strategies through effective planning. The tactic of reducing your tax burden is what is often referred to as tax-loss harvesting.
It involves effectively applying losses the assets may incur from another to offset gains, thus lowering the overall tax burden. But you should note that there are several other strategies to minimize your capital gains taxes.
1. Offset Gains with Losses
This strategy will help you reduce the amount of income tax that is subject to taxation. Tax-loss harvesting, when applied effectively, can reduce both the federal long-term capital gains and California tax rates.
2. Hold Investments Longer
You can take advantage of the federal tax system. While California taxes all capital gains as your ordinary income, the federal system rewards holding your investment for a long time, usually more than a year.
You are likely to reduce your overall tax burden because federal long-term capital gains are slightly lower than short-term rates, which are treated as regular income.
3. Use Tax-Deferred Accounts
Assets placed in tax-deferred accounts such as 401(k)s and IRAs are usually not subjected to capital gains taxes until you withdraw the assets.
Doing this can translate to immense savings, especially if you are a high-income earner. Roth IRAs offer tax-free withdrawals, including capital gains, after age 59 if you meet the rules.
4. Home Sale Exclusion
You are excluded from capital gains tax for the amount you sell your home. It is usually set at $250,000 for single people and $500,000 for couples.
This strategy is only applicable if you are selling your primary home. The other requirement is that you must have owned and lived in the house for at least two years.
5. Create Trusts in Great Jurisdictions
Another strategy you can adopt to reduce tax burden is to create a trust account in tax-friendly jurisdictions.
This strategy will enable you to protect your income from too much taxation. It usually works for individuals and companies with large amounts of wealth to manage.
6. Gift Appreciated Assets
You can also choose to transfer your asset to a family member in a lower tax bracket. If you can do that, you can reduce both your income tax and estate tax exposure.
Potential Changes to Capital Gains Taxes
Federal tax laws are not fixed; they change regularly, with capital gains taxes being a frequent topic of debate in presidential campaigns.
For instance, there was a recent proposal by the federal government to align long-term capital gains with ordinary personal income rates, especially for higher earners.
State and federal regulations can be at odds sometimes. So, you need to be up to date through careful planning and adopting proactive strategies to be able to anticipate future challenges.
Final Thoughts
California capital gains tax brackets are among the most oppressive in the country. With no distinction for long-term capital gains, a 1% surtax for high income, and high state rates, calls for sound tax planning.
By understanding the existing tax regime and even predicting changes, you can help mitigate the tax risks.
You can also improve your tax situation by offsetting gains with losses, choosing long-term investments, strategic gifting, and using retirement accounts.
Also Read:
