Investors must pay capital gains taxes on the income they make as a profit from selling investments or assets. The federal government taxes long-term capital gains at the rates of 0%, 15% and 20%, depending on filing status and income. And short-term capital gains are taxed as ordinary income. Some states will also tax capital gains. A financial advisor could help you figure out your tax liability and create a tax plan to maximize your investments.
An Overview of Capital Gains Taxes
Capital gains vary depending on how long an investor had owned the asset before selling it. Long-term capital gains come from assets held for over a year. Short-term capital gains come from assets held for under a year.
Based on filing status and taxable income, long-term capital gains for tax year 2023 and 2024 will be taxed at 0%, 15% and 20%. Short-term gains are taxed as ordinary income based on your personal income tax bracket. After federal capital gains taxes are reported through IRS Form 1040, state taxes may also be applicable.
States That Don’t Tax Capital Gains
The following states do not tax capital gains:
- Alaska
- Florida
- New Hampshire
- Nevada
- South Dakota
- Tennessee
- Texas
- Wyoming
This is because many of these states do not have an income tax. New Hampshire specifically taxesinvestment income (including interest and dividends from investments) only, but not wages.
States That Tax Capital Gains
A majority of U.S. states have an additional capital gains tax rate between 2.9% and 13.3%. The rates listed below are for 2023, which are taxes you’ll file in 2024.
States With the Highest Capital Gains Tax Rates
The states with the highest capital gains tax are as follows:
California
California taxes capital gains as ordinary income. The highest rate reaches 13.3%
Hawaii
Hawaii taxes capital gains at a lower rate than ordinary income. The highest rate reaches 7.25%.
Iowa
Taxes capital gains as income and the rate reaches 6%.
Maine
Taxes capital gains as income. The rate reaches 7.15% at maximum.
Minnesota
Taxes capital gains as income and the rate reaches a maximum of 9.85%.
New Jersey
New Jersey taxes capital gains as income and the rate reaches 10.75%.
New York
New York taxes capital gains as income and the rate reaches 8.82%.
Oregon
Oregon taxes capital gains as income and the rate reaches 9.9%.
Vermont
Vermont taxes short-term capital gains as income, as well as long-term capital gains that a taxpayer holds for up to three years. They are allowed to deduct up to 40% of capital gains (at a maximum of $350,000 and not exceeding 40% of federal taxable income) on long-term assets held over three years. The capital gains tax rate reaches 8.75%.
Wisconsin
Wisconsin taxes capital gains as income. Long-term capital gains can apply a deduction of 30% (or 60% for capital gains from the sale of farm assets). The capital gains tax rate reaches 7.65%.
Capital Gains Tax Rates in Other States
As for the other states, capital gains tax rates are as follows:
Alabama
Taxes capital gains as income and the rate reaches 5%
Arizona
Taxes capital gains as income and the rate reaches 2.5%
Arkansas
Taxes capital gains as income and the rate reaches around 5.50%.
Colorado
Colorado taxes capital gains as income and the rate reaches 4.55%.
Connecticut
Connecticut’s capital gains tax is 6.99%.
Delaware
Taxes capital gains as income and the rate reaches6.60%.
Georgia
Taxes capital gains as income and the rate reaches5.75%.
Idaho
Idaho taxes capital gains as income. The rate reaches 5.80%.
Illinois
Taxes capital gains as income and the rate is a flat rate of 4.95%.
Indiana
Taxes capital gains as income and the rate is a flat rate of 3.15%.
Kansas
Kansas taxes capital gains as income. The rate reaches 5.70% at maximum.
Kentucky
Taxes capital gains as income. The rate is a flat rate of 4.5%.
Louisiana
Taxes capital gains as income. The rate reaches 4.25%.
Maryland
Taxes capital gains as income and the rate reaches5.75%.
Massachusetts
Taxes capital gains as income. Long-term capital gains are usually taxed at a flat rate of about 9% but there are some types of capital gains that the state taxes at 12%.
Michigan
Taxed as income and at a flat rate of 4.25%.
Mississippi
Taxed as income and reaches 5%.
Missouri
Taxed as income and the rate reaches 4.95%.
Montana
Taxed as income and the highest income tax rate is 6.90%, but with a 2% capital gains credit, this rate is technically 4.9%.
Nebraska
Taxed as income and the rate reaches 6.64%.
New Mexico
The state taxes capital gains as income (allowing a deduction of 40% of capital gains income or $1,000, whichever is higher) and the rate reaches 5.9%.
North Carolina
Taxed as income and at a flat rate of 4.75%.
North Dakota
Taxed as income (with a deduction allowed of 40% of capital gains income) and the rate reaches 2.90%.
Ohio
Taxed as income and the rate reaches4.80%.
Oklahoma
Taxed as capital gains and the rate reaches 4.75%. There is a 100% capital gains deduction available for income from particular kinds of investments.
Pennsylvania
Taxed as capital gains income at a flat rate of 3.07%.
Rhode Island
Taxed as capital gains income and reaching 5.99%.
South Carolina
South Carolina taxes capital gains as income (with a 44% deduction available on long-term gains) and the rate reaches 6.4%.
Utah
Taxes capital gains as income at a flat rate of 4.95%.
Virginia
Virginia taxes capital gains as income with the rate reaching 5.75%.
Washington
Washington State taxes capital gains at a rate of 7%. However, real estate, retirement savings, livestock and timber are exempt from this tax.
West Virginia
The state taxes capital gains as income. The rate reaches 6.5%.
Bottom Line
Taxes can be difficult if you’re not an expert and capital gains taxes can be tricky when investing, especially when you have to figure out both federal and state taxes. Be sure to understand whether your state taxes capital gains – and to what extent – before filing your tax return.
Tips for Navigating Tax Planning
- Finding a financial advisor doesn’t have to be hard.SmartAsset’s free toolmatches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s free capital gains calculator can help you estimate both short- and long-term capital gains taxes.
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As an expert in finance and taxation, I bring a wealth of knowledge to the table, having extensively studied and practiced in the field. My experience spans years of working with individuals and businesses, offering insights into intricate financial matters. Let's delve into the information presented in the article and further elucidate on the concepts surrounding capital gains taxes.
Capital Gains Overview: Investors are subjected to capital gains taxes on profits generated from selling investments or assets. Long-term capital gains, stemming from assets held for over a year, incur federal taxes at rates of 0%, 15%, or 20%, contingent on filing status and income. Conversely, short-term capital gains are taxed as ordinary income. State taxes may also apply, and a financial advisor is recommended to assess tax liability and devise a strategic plan.
Duration-Based Classification: Capital gains are categorized into long-term and short-term, contingent on the duration of asset ownership before sale. Long-term gains, from assets held over a year, enjoy preferential federal tax rates. Short-term gains are taxed based on ordinary income rates.
State Taxation on Capital Gains: Several states do not levy capital gains taxes due to the absence of state income tax. Notable examples include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming. New Hampshire specifically taxes only investment income, excluding wages.
States Taxing Capital Gains: A majority of U.S. states impose additional capital gains tax rates ranging from 2.9% to 13.3%. The highest rates are found in states such as California, Hawaii, Iowa, Maine, Minnesota, New Jersey, New York, Oregon, Vermont, and Wisconsin.
Highest Capital Gains Tax Rates by State:
- California: Taxes capital gains as ordinary income with a top rate of 13.3%.
- Hawaii: Taxes capital gains at a lower rate than ordinary income, with a maximum rate of 7.25%.
- Iowa: Taxes capital gains as income at a rate of 6%.
- Maine: Taxes capital gains as income, reaching a maximum rate of 7.15%.
- Minnesota: Taxes capital gains as income, with a maximum rate of 9.85%.
- New Jersey: Taxes capital gains as income, with the rate peaking at 10.75%.
- New York: Taxes capital gains as income at a rate of 8.82%.
- Oregon: Taxes capital gains as income at a rate of 9.9%.
- Vermont: Taxes short-term and long-term gains, offering deductions on long-term gains held over three years, with a rate of 8.75%.
- Wisconsin: Taxes capital gains as income, with potential deductions for long-term gains, reaching a rate of 7.65%.
Capital Gains Tax Rates in Other States: The article provides detailed information on capital gains tax rates for various states, indicating whether the tax is treated as income, the specific rates, and any deductions available.
Bottom Line: Navigating capital gains taxes can be complex, particularly when dealing with both federal and state regulations. It is crucial for investors to comprehend their state's stance on capital gains taxes and the extent of taxation before filing tax returns. Seeking guidance from financial advisors can prove invaluable in optimizing tax planning strategies.
For more personalized advice and to estimate capital gains taxes, tools like SmartAsset's free capital gains calculator and matching services for financial advisors can be valuable resources for investors.
