Paying capital gains tax on your federal income tax return does not include any state capital gains tax you owe. You must pay your capital gains tax to your state on your state tax return. Depending on where you live, this could add up to a hefty tax bill between your federal and state obligations.
Realizing a Capital Gain
You must sell a capital asset for a profit to realize a capital gain. Paper profits, such as your stocks doing well on the market, for example, do not become taxable gains until you sell the stock; you do not realize a capital gain if you hang onto the stock.
States With No Capital Gains Tax
If you sold the stock and you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington or Wyoming, you’re in luck. As of 2013, these are the only nine states in the U.S. that do not tax individual capital gains. This does not mean you don’t owe the Internal Revenue Service capital gains tax -- you do -- and if you live in any of the other 50 states or Washington D.C., you owe your state a capital gains tax, as well.
California: The “Golden” State
Earthquakes aren’t the only things to shake up Californians. When combined with their federal tax obligations, residents of the “Golden State” pay the highest long-term capital gains tax in the U.S. and the second highest in world, according to "Forbes." At a maximum of 33.3 percent -- 13.3 percent maximum state obligation -- California ranks second only to Denmark, which assesses a staggering 42 percent tax on capital gains.
Rest of the Top 15
New York places second in the U.S., with a maximum state and federal combined capital gains tax of 31.4 percent; New York City residents must pay a local capital gains tax, as well. Oregon is right behind New York at 31 percent; Delaware, New Jersey and Vermont residents pay 30.4 percent. Maryland and Maine keep within the 30 or above percentile at 30.3 and 30.1 percent, respectively; Idaho, Minnesota and North Carolina tax below 30 percent at 29.7 percent; Iowa taxes 29.6 percent; Hawaiians pay 29.4 percent; D.C. residents and Nebraskans pay 29.1 percent, and the percentages continue to decrease for the remaining states that tax capital gains.
Where You Live Counts
Each state has different policies for capital gains taxation, and some local tax authorities also tax capital gains. Where you live is what dictates the assets on which you must pay capital gains taxes and how much you’re going to pay, so consult your state, county and city taxing authorities to determine how much over and above the federal taxes you owe to your state. Consult a tax professional if you do not feel comfortable figuring out your state capital gains tax obligation.
- American Council for Capital Formation: State and Federal Individual Capital Gains Tax Rates -- How High Could They Go?
- Forbes: Killing Golden Goose, California Taxes Capital Gains as Ordinary Income
- Tax Foundation: The High Burden of State and Federal Capital Gains Taxes
- Internal Revenue Service. "Topic No. 409 Capital Gains and Losses." Accessed Nov. 4, 2020.
- Internal Revenue Service. "2019 Publication 550." Accessed Nov. 4, 2020.
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed Nov. 4, 2020.
- Internal Revenue Service. "2019 Publication 523." Accessed Nov. 4, 2020.
- Internal Revenue Service. "Questions and Answers on the Net Investment Income Tax." Accessed Nov. 4, 2020.