Introduction
Capital gains can impact your tax bill significantly—especially if you’re a California resident. Unlike the IRS, California doesn’t offer lower tax rates for long-term capital gains. Let’s break down how California treats capital gains in 2025 and how to report them properly.
What Are Capital Gains?
Applicable Code: IRC §1222; California Revenue & Taxation Code §17041
Capital gains are profits from the sale of a capital asset—such as stocks, real estate, cryptocurrency, or a business. The gain is generally the difference between the selling price and the asset’s adjusted basis (original cost + improvements).
Does California Tax Capital Gains?
Yes. California fully taxes capital gains as ordinary income.
There is no special tax rate for long-term capital gains like at the federal level. Whether you held the asset for one month or 10 years, it is taxed at your California income tax bracket, which ranges from 1% to 13.3%.
California vs. Federal Capital Gains Tax
| Aspect | Federal | California |
|---|---|---|
| Long-Term Gains | 0%, 15%, or 20% | Taxed as ordinary income |
| Short-Term Gains | Taxed as ordinary income | Taxed as ordinary income |
| 1031 Exchanges | Allowed (with limits) | Conforms but with extra reporting |
| Crypto Reporting | Required | Required as ordinary income |
Short-Term vs. Long-Term Capital Gains in California
There is no distinction between short-term and long-term capital gains in California.
Unlike the IRS, California doesn’t offer a lower rate for assets held over one year.
Both types of gains are taxed at full income tax rates.
Examples Based on Filing Status
Example 1 – Single Filer with $10,000 Capital Gain
Total income: $90,000
Capital gain: $10,000
Total taxable income: $100,000
CA tax bracket: ~9.3%
Capital gains tax owed: $930
Example 2 – MFJ with $40,000 Gain from Real Estate
Joint income: $150,000
Capital gain: $40,000
Tax bracket: 9.3%
Capital gains tax owed: $3,720
(Federal may be lower, but California doesn’t adjust)
Reporting Capital Gains in California
Forms Required
- Form 540 or Form 540NR – CA return
- Schedule D (Federal) – Used for IRS, included in CA return
- Schedule CA (540) – Adjust federal income for CA conformity
- Form 3840 – For 1031 exchanges if applicable
Step-by-Step Guide to Stay Compliant
Step 1: Identify all asset sales (stocks, crypto, real estate, NFTs, etc.)
Step 2: Calculate your cost basis and gain
Step 3: Report the sale on federal Schedule D
Step 4: Include the gain in California income using Form 540 & Schedule CA
Step 5: If involved in a 1031 exchange, report on Form 3840
Step 6: Pay estimated tax if your gain is large (to avoid penalties)
Conclusion
California capital gains are taxed just like wages—at your full income tax rate. There are no special exemptions or reduced rates for long-term gains, making it essential to plan in advance and report gains correctly on your state return.
Call to Action
Sold stocks, real estate, or crypto in 2024? Wondering how much you’ll owe California?
Schedule a meeting with Anshul Goyal, CPA EA FCA, a U.S.-licensed CPA and IRS Enrolled Agent. Anshul helps individuals and businesses minimize tax and comply with federal and state laws.
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FAQs – Capital Gains Tax in California
Q1: Does California tax capital gains at a different rate than ordinary income?
No. California taxes all capital gains as regular income.
Q2: Can I offset my gains with capital losses?
Yes. You can offset gains with losses, subject to the same $3,000 per year limit as federal rules.
Q3: Do I report 1031 exchanges to California?
Yes. Even if federal taxes are deferred, California requires Form 3840.
Q4: Is cryptocurrency taxed as capital gains in California?
Yes. Crypto is treated as property, and gains are taxed as ordinary income.
Q5: Can I avoid capital gains tax if I reinvest?
Not for California purposes. Unlike federal rules for real estate, California does not offer deferrals unless a 1031 exchange applies.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant, Enrolled Agent, and Fellow Chartered Accountant from India. With 15+ years of experience and over $200M in client tax savings, Anshul specializes in capital gains tax strategy, real estate transactions, cryptocurrency taxation, and IRS compliance for residents and non-residents.
Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice. Capital gains tax laws can change, and your specific tax treatment may vary. Always consult a licensed CPA before filing or making investment-related decisions.