California Capital Gains Tax Guide 2025: Rates & Strategies

Capital gains tax shape the  investment decisions and overall financial well-being for several taxpayers across the states. Unlike federal tax laws, California treats all capital gains as ordinary income, leading to higher tax rates for many investors. Whether selling stocks, real estate, or other assets, understanding how these taxes work is essential to protecting hard-earned profits. By staying informed about 2025 tax brackets, federal capital gains tax rates, and strategic tax reduction methods, individuals and businesses can make smarter financial moves. Taking the right steps now can minimize tax burdens, optimize investment returns, and help build long-term wealth.

How Capital Gains Are Taxed in California

Unlike federal tax laws that differentiate between short-term and long-term capital gains, California treats all capital gains as regular income. This means that whether you’ve held an asset for one month or ten years, your capital gains are taxed at the same rate as your ordinary income.

Key Points:

• Short-Term vs. Long-Term Gains: Unlike the federal government, California does not provide a lower tax rate for long-term capital gains. All gains are taxed at the same rate as your income tax bracket.
• State Tax Rates: California’s income tax rates range from 1% to 13.3%, depending on your taxable income.
• Exemptions and Deductions: Certain exemptions may apply, such as the $500,000 home sale exclusion for married couples ($250,000 for single filers) if specific requirements are met.
• Investment Types: Capital gains taxes apply to stocks, bonds, cryptocurrency, real estate, and business sales. However, some retirement accounts like 401(k)s and IRAs allow for tax-deferred or tax-free growth.

Understanding how California taxes capital gains is essential for managing your investments efficiently and avoiding unexpected tax liabilities.

California Income Tax Brackets for 2025

California has a progressive income tax system, which means that individuals with higher earnings are subject to higher tax rates. Unlike a flat tax system, where everyone pays the same percentage, California's structure ensures that lower-income earners pay less, while higher-income earners contribute more. This system affects capital gains taxation significantly, making it important to understand where you fall. Here are the expected tax brackets for 2025:

 

Taxable Income Range	Single Filers	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%

Additional Notes:

• An extra 1% Mental Health Services Tax applies to taxable income over $1,000,000, increasing the top marginal rate to 13.3%.
• Married Filing Jointly tax brackets are double those of Single Filers.
• Married Filing Separately follows the same structure as Single Filers.
• Head of Household brackets are similar to Single Filers, but with different income thresholds for some tax rates.

 

Federal Capital Gains Tax Rates for 2025

The federal government taxes capital gains differently from California, distinguishing between short-term (held for one year or less) and long-term (held for more than one year) capital gains. This distinction is crucial because long-term capital gains benefit from lower tax rates, making it more favorable for investors who hold assets for an extended period. Understanding these rates can help in strategic tax planning.

 

Filing Status	Short-Term Capital Gains Tax (Ordinary Income Tax Rates: 10% - 37%)	Long-Term Capital Gains Tax
Single Filers	10% – 37% (Based on income bracket)	0% (Up to $48,350)
		15% ($48,351 – $533,400)
		20% (Over $533,400)
Married Filing Jointly	10% – 37% (Based on income bracket)	0% (Up to $96,700)
		15% ($96,701 – $600,050)
		20% (Over $600,050)
Married Filing Separately	10% – 37% (Based on income bracket)	0% (Up to $48,350)
		15% ($48,351 – $300,025)
		20% (Over $300,025)
Head of Household	10% – 37% (Based on income bracket)	0% (Up to $64,750)
		15% ($64,751 – $566,700)
		20% (Over $566,750)

 

2025 Federal Short-Term Capital Gains Tax Rates

 

Rate	Single Filers	Married Filing Jointly	Married Filing Separately	Head of Household
10%	$0 – $11,925	$0 – $23,850	$0 – $11,925	$0 – $17,000
12%	$11,926 – $48,475	$23,851 – $96,950	$11,926 – $48,475	$17,001 – $64,850
22%	$48,476 – $103,350	$96,951 – $206,700	$48,476 – $103,350	$64,851 – $103,350
24%	$103,351 – $197,300	$206,701 – $394,600	$103,351 – $197,300	$103,351 – $197,300
32%	$197,301 – $250,525	$394,601 – $501,050	$197,301 – $250,525	$197,301 – $250,500
35%	$250,526 – $626,350	$501,051 – $751,600	$250,526 – $375,800	$250,501 – $626,350
37%	Over $626,350	Over $751,600	Over $375,800	Over $626,350

 

Key Notes:

• Short-term capital gains (assets held for one year or less) are taxed as ordinary income, meaning rates depend on your overall taxable income (ranging 10% – 37%).
• Long-term capital gains (assets held for more than one year) have lower tax rates (0%, 15%, or 20%) based on taxable income.
• Married Filing Separately follows the same structure as Single Filers, with income thresholds split in half for long-term gains.
• Net Investment Income Tax (NIIT): A 3.8% surtax may apply to high earners with income above $200,000 (Single) or $250,000 (Married Filing Jointly).

Comparing Federal & California Capital Gains Tax Rates (2025)

 

Income Level	Federal Long-Term Capital Gains Tax	Net Investment Income Tax (NIIT)	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% + 1% (Mental Health Tax)	37.1%
$2,000,000+	20%	3.8%	13.3% + 1% (Mental Health Tax)	38.1%

Key Takeaways:

• Federal long-term capital gains tax remains at 0%, 15%, or 20%, depending on taxable income.
• California taxes all capital gains as ordinary income, with rates up to 13.3%, plus a 1% Mental Health Services Tax on income exceeding $1,000,000.
• Net Investment Income Tax (NIIT) of 3.8% applies to high-income earners ($200,000+ for Single, $250,000+ for Married Filing Jointly).
• Total tax rate for high earners ($1M+) can reach up to 38.1%, making tax-efficient strategies essential.

Strategies to Minimize Capital Gains Tax in California

Reducing capital gains tax requires careful planning and smart investment decisions. Here’s how you can legally lower your tax burden and keep more of your hard-earned profits:

1. Use Tax-Advantaged Accounts

One of the best ways to shield investments from capital gains taxes is by using 401(k)s, IRAs, and Roth IRAs. Traditional IRAs and 401(k)s allow investments to grow tax-deferred, meaning taxes are paid only when funds are withdrawn in retirement, often at a lower tax rate. Roth IRAs, on the other hand, require after-tax contributions, but withdrawals including investment gains are completely tax-free after age 59½, provided conditions are met. This strategy benefits long-term investors looking to reduce taxable investment gains.

2. Harvest Tax Losses

Tax-loss harvesting helps offset capital gains and reduce taxable income. Selling underperforming stocks or assets at a loss can cancel out taxable gains from other investments. If losses exceed gains, up to $3,000 can be deducted from ordinary income annually. Excess losses can be carried forward indefinitely to offset future gains. This strategy is useful for investors with high capital gains who want to balance profits and losses.

3. Take Advantage of the Home Sale Exclusion

The IRS allows homeowners to exclude a significant portion of capital gains when selling their primary residence. Single filers can exclude up to $250,000, while married couples can exclude up to $500,000 in capital gains. To qualify, the homeowner must have lived in the residence for at least two of the last five years. This exclusion applies only to primary residences, not rental or investment properties. It is especially beneficial for homeowners looking to sell while avoiding hefty capital gains taxes.

4. Invest in Opportunity Zones

Qualified Opportunity Zones (QOZs) offer a way to defer or eliminate capital gains taxes by reinvesting profits into economically distressed communities. Holding an investment for more than five years results in a partial deferral of capital gains tax, while holding it for at least 10 years makes all future appreciation completely tax-free. This strategy allows investors to defer taxes until 2026 if investments are made before the deadline while also contributing to community development.

5. Gift Appreciated Assets

Gifting appreciated stocks or assets to a family member in a lower tax bracket can be a tax-efficient way to reduce capital gains taxes. The recipient may qualify for a 0% federal capital gains tax if their income is below the threshold. Additionally, gifting assets reduces the donor’s taxable estate, making it beneficial for estate planning. The recipient pays tax based on the original purchase price, so timing is important when using this strategy.

6. Hold Investments Longer

California taxes all capital gains as ordinary income, but federal tax laws favor long-term investments. Short-term gains, which apply to assets held for one year or less, are taxed as ordinary income at rates between 10% and 37%. Long-term gains, for assets held for more than a year, are taxed at lower federal rates of 0%, 15%, or 20%. Holding stocks, real estate, or other assets longer can significantly reduce the federal tax burden while allowing for greater investment growth over time.

Conclusion

Navigating California’s capital gains tax system can feel overwhelming, but smart planning can make a big difference. With high tax rates and no special treatment for long-term gains, understanding the right strategies is essential to protect your hard-earned profits. By leveraging tax-advantaged accounts, tax-loss harvesting, home sale exclusions, and Opportunity Zone investments, you can significantly reduce your tax liability while growing your wealth.

Tax laws are complex, and one wrong move can cost you thousands. At NSKT Global, our expert tax consultants specialize in California and federal tax strategies, helping individuals and businesses legally minimize capital gains taxes. Whether you need personalized investment tax planning, IRS compliance guidance, or real estate tax strategies, our team ensures that you keep more of what you earn.

 

FAQs About California Capital Gains Tax

Does California have a separate capital gains tax?

No, California taxes all capital gains as ordinary income under its progressive tax system.

What is the highest tax rate for capital gains in California?

The highest rate is 13.3%, plus an additional 1% Mental Health Services Tax on income over $1 million.

Do short-term and long-term capital gains get taxed differently in California?

No, unlike federal law, California taxes all capital gains at regular income tax rates, regardless of holding period.

How can I reduce my capital gains tax in California?

Use tax-advantaged accounts, tax-loss harvesting, home sale exclusions, and Opportunity Zone investments to lower your tax burden.

Is there a way to avoid capital gains tax in California?

While avoiding taxes entirely is difficult, strategies like gifting appreciated assets, deferring gains, or investing through retirement accounts can help minimize them.