Capital gains tax is a levy assessed on the positive difference between the sale price of an asset and its original purchase price. Assets include shares of stock, a piece of land, jewelry, coin collections, or a business. Capital gains can be reduced by deducting capital losses that occur when a taxable asset is sold for less than the original purchase price, resulting in “net capital gains.”
There are two types of capital gains tax: short-term and long-term. Short-term capital gains tax is levied on profits from the sale of an asset held for one year or less. The short-term capital gains tax rate equals the individual’s ordinary income tax rate (bracket). Long-term capital gains tax is levied on profits from the sale of an asset held for more than a year. Long-term capital gains tax rate is 0%, 15%, or 20% depending on the individual’s taxable income and filing status. Long-term capital gains tax rates are typically lower than short-term rates.
In addition to paying capital gains tax at the federal levels, a majority of U.S. states also have an additional tax rate between 2.90% and 13.30%. The states with no additional state tax on capital gains are: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. These are the same states that do not tax personal income on wages, although they might tax interest and dividends from investments, depending on the state. These states typically make up for their lack of overall tax income with higher sales and property taxes.
California has the highest capital gains tax rate of 13.30%. California has notoriously high taxes and with up to 39.6% in federal taxes alone, the state taxes can seem especially deep. For higher-income taxpayers, the capital gain rate at the federal level if 20%, plus a 3.8% net investment tax under Obamacare, plus 13.3%. Hawaii has the second-highest capital gains tax rate of 11.00%, followed by New Jersey with 10.75%, Oregon with 9.90%, and Minnesota with 9.85%.