What To Know About States With No Or Low Capital Gains Tax

Capital gains result from profits from selling your home or other investments. You'll face federal taxes due to capital gains. However, your state may also charge capital gains, which are reported and taxed as income in the year they are "realized." 

Do you live in a state that charges capital gains tax? Let's find out.

We'll walk you through an overview of capital gains, the states with lowest capital gains tax and the states with the highest.

What’s Capital Gains Tax?

The capital gains tax is a tax that applies to profits when you sell assets and investments. Depending on how long you've owned an asset or investment and your earnings for the year, you'll owe a certain amount. The tax rate can be as low as 0% or as high as 37%. Many states tax capital gains, but some don't.

Capital gains come in two types: short term and long term.

• Short-term capital gains tax: Short-term capital gains tax refers to a tax on the profits on the sale of investments or assets you've owned for less than 1 year, charged at the income tax rate – 10%, 12%, 22%, 24%, 32%, 35% or 37%.
• Long-term capital gains tax: Long-term capital gains tax applies if you've held an asset or investment for longer than 1 year. You'll pay 0%, 15% or 20% depending on your yearly earnings.

The types of assets or investments that get taxed include stocks, bonds, cryptocurrency or items like boats or cars. They also apply when selling a home and taxes on real estate investments.

How Does Capital Gains Tax Work?

Capital gains taxes are progressive and similar to income taxes. The amount you'll pay varies depending on the circumstances, including your income bracket and the time you've held the asset. The capital gains tax differs on the federal level versus the state level. Let's look at how the capital gains tax works at the federal level:

Federal long-term capital gains tax: Federal long-term capital gains tax is used for assets held for more than a year. Suppose you've held a stock for more than 1 year. The sale of your stock will require you to pay 0%, 15% or 20%, based on your income:

Federal short-term capital gains tax: Short-term capital gains tax, on the other hand, follows the federal income tax brackets for ordinary income:

How might capital gains apply?

Here's an example: Let's say you are married, filing jointly, and your income is $100,000. You'd pay the long-term capital gains tax rate on an item – 15%. If you held an item for less than 1 year, you'd pay the 22% rate.

Most states tax your investment income at the same rate they charge for earned income, for short- and long-term capital gains, but some use a different method to tax. Some states charge no income tax at all. Some states allow you to deduct a certain amount of capital gains.

Learn more about your state's tax law, rules and conditions, or use a calculator to help you determine how much you'll pay for capital gains.

States With No Capital Gains Tax

State tax laws vary, and it's important to research current laws and work with a tax professional to have the most up-to-date information possible. The best states for capital gains tax – those states without capital gains tax – include the following:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Texas
• Washington
• Wyoming

Note that Washington does have a capital gains tax on profits over $250,000, but not on real estate.

At face value, no capital gains tax may seem appealing. However, these states often compensate for their lack of income and capital gains taxes with higher sales and property taxes.

States With The Lowest (But Some) Capital Gains Tax

The following states have the lowest capital gains tax.

For example, an entrepreneur may find moving to one of these states beneficial because of the perceived cost savings opportunities. Or, if a retiree plans to retire in a state that doesn't have state capital gains tax, they may reason that it makes sense to hold onto their investments until they retire.

States With The Highest Capital Gains Tax

At 13.3%, California has the country's highest capital gains tax rates. Let's take a look at the other four highest capital gains tax per state:

Capital Gains Tax Vs. Income Tax Rates

Taxable income refers to income you receive during the tax year. Federal capital gains, on the other hand, specifically refers to earnings on certain types of investments. Some states tax capital gains tax as income, which can be significant for home sellers.

Let's take a look at real estate. Individuals are exempt from taxes on the first $250,000 of profit on the sale of their primary residence, while married couples are exempt from taxes on the first $500,000.

If you sell your property before living in it as a primary residence for at least 2 out of the 5 years before selling, you'll pay two taxes: Long-term capital gains and ordinary income taxes on any profit you realized from the sale in the first year.

How To Find Your State’s Capital Gains Tax Rate

You can learn more about your state’s capital gains tax rates and requirements through your state's government website or through a certified, vetted tax professional.

You can report your realized gains (and losses) on Schedule D, an IRS tax form. You will report the total purchase price of the asset, the asset sale price and whether you held the asset for short- or long-term. Choosing the right tax professional can ensure your taxes are legal and correct.

The Bottom Line

Taxpayers can’t avoid capital gains tax at the federal level, but state taxes are a different story. There are nine states with no capital gains tax, while other states charge lower rates on capital gains. Beware if you live in California, New York or New Jersey – they have some of the highest capital gains rates in the country.

Ready to sell your home? Connect with an expert real estate agent.