Introduction
Capital gains are often taxed at preferential rates at the federal level. But in California, the story is different. Whether you’re selling stocks, real estate, or business assets, you might be surprised to find that California doesn’t distinguish capital gains from regular income. Here’s how capital gains are taxed in 2025.
How Capital Gains Are Taxed in the U.S.
Applicable Code:
- IRC §1(h) (Federal capital gains rates)
- CA Revenue & Taxation Code §17041 (California income taxation)
At the federal level, long-term capital gains (assets held over 1 year) are taxed at 0%, 15%, or 20%, depending on income. Short-term capital gains are taxed at ordinary income rates.
California, however, does not provide special tax rates for long-term capital gains.
California’s Approach to Capital Gains
In California, all capital gains—whether short-term or long-term—are taxed as ordinary income using the state’s progressive income tax rates (up to 13.3%).
This means:
- Selling stock = taxed as ordinary income
- Selling real estate = taxed as ordinary income
- Crypto and NFT gains = taxed as ordinary income
- Business asset sales = taxed as ordinary income
There is no distinction between capital gains and wages.
Types of Income Considered Capital Gains
- Sale of stocks or mutual funds
- Real estate sales (excluding Section 121 home sale exclusion)
- Cryptocurrency gains
- NFTs and digital assets
- Business interests
- RSUs and ISOs when exercised or sold
Even inherited property with a stepped-up basis may trigger capital gains if sold.
Real Examples of Capital Gains Tax in California
Example 1: Selling Stock
- Purchase: $20,000
- Sale: $70,000
- Capital Gain: $50,000
- Federal Tax (long-term): 15% = $7,500
- California Tax (ordinary income): 9.3% = $4,650
Example 2: Real Estate
- Purchase: $500,000
- Sale: $850,000
- Exclusion (primary residence under IRC §121): $250,000 (single)
- Capital Gain: $100,000
- California Tax: taxed at your marginal rate, e.g., 9.3% = $9,300
Special Considerations for Real Estate & Stock Options
Real Estate:
- IRC §121 allows up to $250,000 (single) or $500,000 (joint) exclusion on primary residence gain
- Must live in the home 2 of the last 5 years
Incentive Stock Options (ISOs):
- Spread is taxed by California when exercised or sold
- Watch for Alternative Minimum Tax (AMT) implications
RSUs:
- Taxed at ordinary income rates when vested, not capital gains
Step-by-Step Guide to Report Capital Gains in California
Step 1: Track your basis and holding period
Step 2: Report gains on IRS Schedule D and Form 8949
Step 3: Report the same on California Form 540
Step 4: Use Form 540NR if you’re a nonresident with CA-sourced gains
Step 5: Pay tax based on your total CA taxable income
Step 6: Retain transaction records for 4–7 years
Conclusion
California does not have a separate capital gains tax—but it fully taxes capital gains as regular income at some of the highest rates in the country. In 2025, smart timing, residency planning, and use of exclusions like IRC §121 can help you save significantly.
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Planning a major stock or real estate sale in 2025?
Schedule a consultation with Anshul Goyal, CPA EA FCA, a U.S.-licensed CPA and IRS Enrolled Agent who helps clients minimize capital gains tax exposure in California through structuring, residency planning, and IRS-compliant strategies.
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FAQs – California Capital Gains Tax
Q1: Does California have a lower tax rate for long-term capital gains?
No. Capital gains are taxed at ordinary income rates, just like wages.
Q2: Can I avoid California capital gains tax by moving to another state?
Only if the gain is not from California-sourced property or if you move and cut all ties before the gain is realized.
Q3: Does California tax crypto gains?
Yes. All cryptocurrency gains are taxed as ordinary income in California.
Q4: What if I inherit property and sell it?
You’ll receive a stepped-up basis, but any gain above that is taxed at your marginal rate.
Q5: Are RSUs and stock options taxed as capital gains?
Generally, RSUs are taxed as income, not capital gains. ISOs may qualify, but California still taxes the spread.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant, IRS Enrolled Agent, and Fellow Chartered Accountant. With more than 15 years of experience, he specializes in capital gains planning, real estate transactions, stock compensation, and California state tax compliance.
Disclaimer
This blog is for educational purposes only and does not constitute legal or tax advice. California tax laws and interpretations may change. Always consult a licensed CPA before making decisions involving capital gains or large asset sales.