If you sell stock, real estate, or a business, the federal capital gains tax is only part of the picture. Depending on where you live, your state may tax those gains as ordinary income, apply a preferential rate, impose a standalone excise tax, or charge nothing at all. The differences can add up to tens of thousands of dollars on a single transaction.
Federal Capital Gains: The Baseline
Before layering on state taxes, here's where federal rates stand for 2026:
Long-term capital gains (assets held over one year):
| Taxable Income (Single) | Rate |
|---|
| Up to $49,450 | 0% |
| $49,450 – $545,500 | 15% |
| Over $545,500 | 20% |
Short-term capital gains (assets held one year or less) are taxed at ordinary income rates — up to 37.00% federally.
The Net Investment Income Tax (NIIT) adds an additional 3.8% on investment income for individuals with modified AGI above $200,000 (single) or $250,000 (MFJ). Those thresholds are fixed in statute and are not indexed, so they capture more filers every year. The NIIT applies regardless of which state you live in.
How States Treat Capital Gains
State approaches fall into four broad categories.
Category 1: Taxed as Ordinary Income (The Majority)
Most states with an income tax treat capital gains exactly like wages, salaries, and other ordinary income. There's no preferential rate — gains are simply added to your taxable income and taxed at whatever bracket they fall into.
This includes many of the highest-tax states:
| State | Top Marginal Rate (applied to cap gains) |
|---|
| California | 13.30% |
| New York | 10.9% (+ NYC surcharge up to 3.876%) |
| New Jersey | 10.75% |
| Oregon | 9.90% |
| Minnesota | 9.85% |
| Connecticut | 6.99% |
For a high-income investor in California, the combined federal + state + NIIT rate on long-term gains can reach 37.1% (20% + 13.3% + 3.8%). In New York City, it's even higher at roughly 34.7% before the city surcharge pushes it above 38.5%.
Minnesota adds a second layer that is easy to miss. On top of its 9.85% top rate, Minn. Stat.
§290.033 imposes a 1% state-level net investment income tax on investment income above $1
million, effective for tax years beginning after 31 December 2023. It applies to the excess
only, and the $1 million threshold does not double for joint filers. Capital gains count as
investment income for this purpose, so a large Minnesota gain can face 10.85% at the state level
before federal tax.
Category 2: Preferential Rates or Partial Exclusions
A smaller number of states offer real relief for capital gains, through reduced rates, partial
exclusions, or outright exemption. These are the states TaxMath models as departing from ordinary
treatment:
| State | Treatment |
|---|
| Missouri | Long-term gains wholly exempt from the state base, from tax year 2025 |
| Arkansas | Excludes 50% of net capital gains; gains above $10 million are wholly exempt |
| North Dakota | Excludes 40% of net long-term gains |
| South Carolina | Deducts 44% of net capital gains |
| Wisconsin | Excludes 30% of net gains on assets held more than one year (60% for farm assets) |
| Arizona | Excludes 25% of net long-term gains |
| Hawaii | Alternative maximum rate of 7.25% on net long-term gains, rather than its 11% ordinary top rate |
| Montana | A separate preferential schedule — 3.0% on gains up to $47,500, 4.1% above |
| Vermont | Flat exclusion of the first $5,000 of eligible gains |
| New Mexico | Flat exclusion of the first $2,500 of net gains |
These treatments can move the effective rate a long way. A South Carolina investor at the top
bracket pays roughly 2.92% on long-term gains — the 5.21% top rate applied to the 56% of the
gain that remains after the 44% deduction.
Colorado is often listed here and does not belong. Its capital gain subtraction (C.R.S.
§39-22-518) is restricted to farmers and ranchers filing IRS Schedule F, and only on Colorado
agricultural real property acquired between 9 May 1994 and 3 June 2009. For a general stock sale
or small-business sale it is worth nothing.
Category 3: No Capital Gains Tax
Eight states have no individual income tax and no tax on capital gains: Alaska, Florida, Nevada,
New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
Washington is the ninth state with no broad income tax — but it does tax capital gains, so it
does not belong on that list. It is covered below. Texas, for its part, closed the door on ever
joining Washington: a 2025 constitutional amendment bans taxing capital gains, realized or
unrealized.
For investors, these states offer the simplest path to minimizing state-level capital gains tax. The combined rate on long-term gains is just the federal 20% (at the top bracket) plus 3.8% NIIT — a total of 23.8% with no state layer.
Category 4: Washington's Standalone Capital Gains Tax
Washington doesn't have a broad income tax, but it does impose a 7% excise tax on the sale of stocks, bonds, and other capital assets when gains exceed $278,000 in a year (indexed for inflation). The tax was upheld by the Washington Supreme Court in 2023, which classified it as an excise tax rather than an income tax.
Key details:
- Applies only to gains above the $278,000 threshold
- Excludes real estate, retirement accounts, livestock, and certain small business sales
- No deduction for capital losses below the threshold
- Married couples filing jointly share a single threshold (not doubled)
The rate is no longer flat. SB 5813 added a second tier effective tax year 2025: the 7% rate
applies to the first $1 million of taxable gains, and 9.9% applies above that (RCW 82.87.040).
Most coverage still describes Washington as a flat 7% state; for a large sale it is not.
For a Washington resident selling $500,000 in stock gains, the state tax is $15,540 (7% ×
$222,000 above the threshold). Combined with the federal 20% + 3.8% NIIT, the total rate on that
amount is 30.8%. On a much larger gain the top tier applies: a $1.5 million gain in 2025
produces $91,978 of Washington tax — $70,000 at 7% plus $21,978 at 9.9% on the $222,000 of
taxable gain above the $1 million breakpoint — and pushes the maximum combined rate to 33.7%.
Combined Federal + State Rates: A Comparison
Here's the maximum combined long-term capital gains rate for selected states (assuming top federal bracket + NIIT):
| State | State Rate | Combined Rate (Fed + State + NIIT) |
|---|
| California | 13.3% | 37.1% |
| New York (+ NYC) | 14.8% | 38.6% |
| New Jersey | 10.75% | 34.55% |
| Oregon | 9.9% | 33.7% |
| Minnesota | 9.85% (+1% state NIIT above $1M) | 33.65% |
| Hawaii | 7.25% (alternative maximum rate) | 31.05% |
| Massachusetts | 9.0% (5% + 4% surtax) | 32.8% |
| Washington | 9.9% (top tier, above $1M of taxable gains) | 33.7% |
| Texas / Florida | 0% | 23.8% |
The spread between California and Texas is 13.3 percentage points — on a $1 million long-term gain, that's a $133,000 difference in state tax alone.
Massachusetts: The Millionaire Surtax on Capital Gains
Massachusetts deserves special mention. In November 2022, voters approved a 4% surtax on income above a $1 million threshold, including capital gains, effective for tax year 2023. This pushed the effective top rate on high capital gains from 5% to 9%.
The threshold is indexed for inflation and has moved every year since: $1,000,000 (2023), $1,053,750 (2024), $1,083,150 (2025), and $1,107,750 for 2026. A business owner selling a company for $5 million in Massachusetts in 2026 pays roughly $155,690 in surtax — 4% of the $3,892,250 above the threshold — on top of the 5% base rate.
The structure means a single large capital gains event — selling a business, a large stock position, or investment property — can trigger the surtax even for taxpayers who don't earn $1 million in a typical year.
Planning Considerations
Timing of Gains
If you're planning a significant asset sale, the year you close matters. This is particularly relevant if you're near the Massachusetts surtax threshold ($1,107,750 for 2026), Washington's $278,000 threshold, or if you're considering a state residency change.
State Residency Changes
Moving from a high-tax state to a no-income-tax state before realizing a large gain is a well-known strategy — and one that states actively scrutinize. California, New York, and others have aggressive residency audit programs. Simply changing your driver's license isn't enough: New York's own domicile and statutory-residence tests are typical of what you have to satisfy — selling or leasing your former home, moving your personal and professional life, and counting days in the new state.
Opportunity Zones
Federal Opportunity Zone deferrals and exclusions remain available and can reduce capital gains tax regardless of state. Investing gains into a Qualified Opportunity Fund defers the original gain and, if held for 10 years, eliminates tax on the appreciation of the Opportunity Zone investment itself. State treatment of Opportunity Zones varies — some conform to the federal rules, others don't.
Installment Sales
Spreading a gain over multiple tax years through an installment sale can keep you in lower federal brackets and potentially below state surtax thresholds (like the Massachusetts surtax threshold or Washington's $278,000 threshold).
The Bottom Line
The state you live in can add anywhere from 0% to over 14% to your capital gains tax rate. For anyone with significant investment income, business sale proceeds, or real estate gains, the state layer isn't an afterthought — it's a major variable. Use the TaxMath calculator to model your specific scenario across states before making decisions.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.