Capital gains tax plays a significant role in shaping financial decisions—especially for investors, property owners, and entrepreneurs in California. Unlike the federal tax system, California treats all capital gains as ordinary income, often resulting in higher tax bills for those who realize investment profits.
Whether you’re selling stocks, real estate, or other high-value assets, understanding how capital gains are taxed in California in 2025 can help you avoid costly surprises and improve your long-term financial outcomes. This comprehensive guide breaks down the current tax brackets, compares state and federal rates, and outlines actionable strategies to reduce your tax burden.
How Capital Gains Are Taxed in California
California does not follow the federal model of offering lower rates for long-term capital gains. Instead, the state taxes all capital gains—regardless of how long the asset was held—as regular income.
Quick Overview:
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Short-Term vs. Long-Term Gains: California doesn’t differentiate. Both are taxed using the same income tax brackets.
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Applicable Assets: Tax applies to gains from selling stocks, bonds, crypto, real estate, and business interests.
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Exceptions: Capital gains from tax-advantaged accounts like IRAs or 401(k)s may be tax-deferred or tax-free.
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Home Sale Exclusion: Up to $250,000 (single) or $500,000 (married) in gains from the sale of a primary residence may be excluded, provided IRS residency and ownership requirements are met.
2025 California Income Tax Brackets
California uses a progressive tax system, meaning the rate increases as income increases. These brackets also apply to capital gains.
| 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% |
Note:
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A 1% Mental Health Services Tax applies to income over $1 million, raising the top marginal rate to 13.3%.
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Joint filers typically face double the income thresholds compared to single filers.
2025 Federal Capital Gains Tax Rates
At the federal level, capital gains are categorized as either short-term or long-term:
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Short-Term Gains (≤ 1 year): Taxed as ordinary income, using your federal income tax bracket (10% to 37%).
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Long-Term Gains (> 1 year): Benefit from reduced rates: 0%, 15%, or 20%, depending on your income.
Federal Long-Term Capital Gains Tax Brackets:
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $48,350 | $48,351 – $533,400 | Over $533,400 |
| Married Filing Jointly | Up to $96,700 | $96,701 – $600,050 | Over $600,050 |
| Married Filing Separately | Up to $48,350 | $48,351 – $300,025 | Over $300,025 |
| Head of Household | Up to $64,750 | $64,751 – $566,700 | Over $566,700 |
Federal Short-Term Capital Gains (Ordinary Income) Brackets:
| Rate | Single | 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 |
Net Investment Income Tax (NIIT): An additional 3.8% tax may apply to individuals earning above $200,000 (Single) or $250,000 (Joint), increasing the total burden on capital gains.
Side-by-Side Comparison: Federal vs. California Capital Gains Taxes (2025)
| Income Level | Federal Long-Term CGT | NIIT | California CGT | 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% | 13.3% | 37.1% |
| $2,000,000+ | 20% | 3.8% | 13.3% | 38.1% |
Top Strategies to Reduce Capital Gains Tax in California
Minimizing your capital gains tax takes planning. Here are six time-tested strategies:
1. Use Tax-Advantaged Retirement Accounts
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401(k)s and Traditional IRAs defer taxes until withdrawal—often in a lower bracket.
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Roth IRAs offer tax-free withdrawals, including gains, after age 59½ if rules are met.
2. Tax-Loss Harvesting
Offset gains by selling assets at a loss. Losses can:
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Offset gains dollar for dollar
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Deduct up to $3,000/year from ordinary income
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Carry forward indefinitely
3. Home Sale Exclusion
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Exclude up to $250K (single) or $500K (married) in gains on the sale of your primary home.
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Must have owned and lived in the home for 2 of the last 5 years.
4. Invest in Qualified Opportunity Zones
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Defer or eliminate gains by reinvesting in designated low-income areas.
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Hold for 10 years to exclude gains on new investments entirely.
5. Gift Appreciated Assets
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Transfer assets to a family member in a lower tax bracket.
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Can reduce both income tax and estate tax exposure.
6. Hold Investments Longer
While California doesn’t favor long-term holding, the federal government does. Keeping assets longer than a year qualifies for reduced federal rates of 0%, 15%, or 20%.
Final Thoughts
California’s capital gains tax laws are among the most aggressive in the country. With no distinction for long-term gains, high state rates, and a 1% surtax for millionaires, effective tax planning is essential.
By using retirement accounts, loss harvesting, strategic gifting, and Opportunity Zone investments, individuals and businesses can significantly reduce their overall tax liability. Understanding where state and federal rules diverge is key to building—and keeping—wealth in 2025 and beyond.
Learn more: Robert Hall & Associates | Los Angeles Tax Preparation & Consulting
