How Are Long-Term Capital Gains Taxed in California? Federal and State Rules

California generally taxes long-term capital gains as ordinary state income, without a separate lower rate for holding an asset more than a year. Federal rules can apply different long-term capital gains rates to the same sale. A California household considering a sale needs to evaluate both systems, along with its other income and circumstances.

If you hold a concentrated stock position, plan to sell a business, or have inherited investments, the tax rules may affect how you evaluate the sale. This guide compares the federal and California rules before examining broader planning considerations.

This article is educational only. It is not individual tax advice. Every strategy below depends on your specific facts, and it should be reviewed with a qualified tax professional before you act on it.

California Long-Term Capital Gains Tax Versus Federal Tax

The California Franchise Tax Board says California taxes both short-term and long-term capital gains as ordinary income. Unlike the federal system, the state has no preferential long-term rate. The table below shows 2025 California ordinary income brackets for one filing-status schedule, not a separate capital gains rate or a 2026 state schedule.

2025 California Tax Rate Schedule X, Single and Married or Registered Domestic Partner Filing Separately

(Source: California Franchise Tax Board, 2025 California Tax Rate Schedules, Schedule X. This 2025 schedule is for single filers and married or registered domestic partners filing separately. For 2025 taxable income of $100,000 or less, the Franchise Tax Board directs filers to the tax table instead.)

The Franchise Tax Board indexes these brackets annually for inflation, so the 2025 schedule above is not a 2026 rate table. Under the 2026 Form 540-ES instructions, an additional 1% Behavioral Health Services Tax (previously the Mental Health Services Tax) applies to taxable income above $1 million, which brings the top marginal rate to 13.3% for income above that threshold when combined with the 12.3% top rate in the linked 2025 Schedule X. This is a comparison using a 2025 state schedule, not a 2026 California bracket table.

For an illustration using the linked 2026 federal thresholds and 2025 California Schedule X and surtax rules, a gain in the 15% federal long-term band could also face California ordinary income tax. At the stated maximum marginal rates, 20% federal plus 13.3% California equals 33.3%, or 37.1% if the 3.8% Net Investment Income Tax also applies. These illustrative sums are not a taxpayer's effective tax rate, and actual taxes depend on income, residency, and other circumstances.

California residents should also know that California does not conform to the federal Qualified Small Business Stock (QSBS) exclusion. Founders and early employees who qualify for the federal QSBS gain exclusion on stock sales should not assume the same exclusion applies at the California level. Our financial planning for California households page covers more of these state-specific considerations.

How Do Federal Long-Term Capital Gains Rates Work in 2026?

Capital gains tax applies when you sell an investment, business interest, or other capital asset for more than your cost basis (generally what you paid for it). The rate you pay depends heavily on how long you held the asset.

Assets held one year or less generate short-term capital gains, which are taxed as ordinary income at your regular federal income tax rate. Assets held more than one year generate long-term capital gains, which qualify for preferential rates: 0%, 15%, or 20% for 2026, depending on your total taxable income (your income after deductions, including the gain itself).

Here is how the 2026 federal long-term capital gains brackets break down by filing status, based on Internal Revenue Service (IRS) Revenue Procedure 2025-32:

(Source: IRS Revenue Procedure 2025-32)

A gain is taxed in layers, not as a single flat rate. If your income puts part of the gain in the 0% band and part above the 15% threshold, only the portion above each threshold is taxed at the higher rate. But because the gain itself counts as income, realizing a large gain can push other income, and later portions of the same gain, into a higher bracket than you expected.

For 2026, higher-income taxpayers may also owe the 3.8% Net Investment Income Tax (NIIT) on top of the capital gains rate. NIIT generally applies once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. It is a separate tax from the capital gains rate itself, so it stacks on top rather than replacing anything.

For 2026, a few asset types carry their own special federal rates outside the standard 0%/15%/20% structure: collectibles are taxed up to 28%, and unrecaptured Section 1250 gain on certain real estate is taxed up to 25%.

Why Concentrated Stock Holders Face the Biggest Capital Gains Risk

Few situations create more capital gains exposure than a single stock position that has grown to represent a large share of someone's net worth. This is common for long-tenured employees who received stock options or an employee stock purchase plan, and for founders and early employees at companies that later went public.

Consider a hypothetical example, for illustration only. Suppose an investor acquired 10,000 shares of employer stock years ago at $20 per share, for a cost basis of $200,000. Today the stock trades at $200 per share, so the position is worth $2,000,000, leaving an unrealized gain of $1,800,000.

If this investor sold the entire position in one transaction and the gain fell entirely in the top federal bracket, the math could look like this:

• Federal long-term capital gains tax at 20%: $360,000
• Potential NIIT at 3.8%: $68,400
• Potential California state tax, which has no separate capital gains rate and taxes the gain as ordinary income up to 13.3%

Federal tax plus NIIT alone comes to $428,400 on this hypothetical gain. California tax would be layered on top of that, and the exact amount depends on the investor's total income and residency. The graphic uses the linked 2026 federal capital gains thresholds and 2026 Net Investment Income Tax rules alongside the linked 2025 California Schedule X and surtax rules. It adds maximum marginal rates for comparison, not a calculation of any person's actual tax. This is a hypothetical illustration only, not a projection for any specific investor, and actual results depend on individual tax circumstances.

For many investors, reducing a position this concentrated is a common long-term goal, since a single company carries company-specific risks a diversified portfolio does not. Whether that applies to any particular household depends on its full financial picture. The challenge is that selling enough of the position to meaningfully reduce that risk can itself trigger a large, one-time tax bill. How you trim a winning position matters as much as the decision to trim it. Our earlier piece on concentration, diversification, and the investment tier strategy walks through how we think about sizing a reduction plan around a client's broader financial goals.

Strategies to Manage Capital Gains

None of the approaches below eliminate capital gains tax outright. Used together and coordinated with a broader financial plan, they may help manage when and how much tax is due.

Tax-Loss Harvesting

Tax-loss harvesting means selling an investment that has lost value to realize a capital loss, which can offset capital gains elsewhere in your portfolio dollar for dollar. Under the IRS capital loss rules, if losses exceed gains in a given tax year, up to $3,000 of the net loss can be deducted against ordinary income annually, or $1,500 for married taxpayers filing separately, with any remainder carried forward to future years.

One rule to watch closely: the IRS wash sale rule disallows the loss if you buy the same security, or one the IRS considers substantially identical, within 30 days before or after the sale. Harvesting losses works best as an ongoing, disciplined practice rather than a once-a-year scramble in December.

Charitable Giving and Donor-Advised Funds

Donating appreciated stock directly to a qualified charity or a donor-advised fund can accomplish two things at once: for stock held more than one year, it may generate a charitable deduction for the stock's fair market value, subject to Adjusted Gross Income (AGI) limits, generally 30% of AGI for qualifying gifts of long-term appreciated property to eligible public charities, and it avoids capital gains tax on the appreciated portion entirely, since neither you nor the charity pays tax on the transfer. This works only for stock donated directly, not stock you sell first and then donate the cash from.

Two changes that took effect for the 2026 tax year can narrow this benefit for higher-income donors under IRS Publication 505 (2026). First, itemizers face a 0.5% of AGI floor, meaning only giving above that floor can produce an itemized charitable deduction. Second, the 2026 overall itemized deduction limit may reduce deductions for taxpayers above the applicable taxable-income threshold. The IRS describes a 5.4% reduction of the lesser of total itemized deductions or taxable income above that threshold. How much the limit affects a taxpayer depends on the applicable calculation. Together these rules can increase the after-tax cost of large gifts. One common response is bunching, meaning concentrating several years of intended giving into a single year through a donor-advised fund, which clears the 0.5% floor once rather than absorbing it annually, with grants then distributed to charities over time.

Charitable strategies depend heavily on individual circumstances, including whether charitable giving is already part of your goals. They are not a substitute for a giving plan you would not otherwise have wanted.

Staged Selling Over Multiple Years

Rather than selling an entire concentrated position at once, some investors sell in tranches spread across two or more tax years. Spreading gains this way may keep income below the 20% federal bracket threshold in a given year, and can smooth out the interaction between the gain and other income sources like bonuses or business income.

The trade-off is market risk: the unsold portion of the position remains exposed to the stock's price movements for as long as it is held, which is the same concentration risk the sale is meant to reduce. A staged approach requires balancing tax efficiency against how much concentration risk you are comfortable carrying while the plan plays out.

Installment Sales for Business Owners

Business owners selling a company sometimes structure the transaction as an installment sale, receiving payments over several years rather than a single lump sum at closing. Because the gain is generally recognized as payments are received, spreading the sale over multiple years may keep annual taxable income in lower brackets than a single-year sale would.

The trade-off is collection risk (the buyer's ability to make future payments) and added legal and structural complexity. Installment sales require careful drafting and should be evaluated alongside the tax planning implications of the specific deal terms, ideally before a letter of intent is signed rather than after. The installment method is not available for sales of publicly traded securities, so it does not apply to the concentrated stock situation described earlier.

Step-Up in Basis for Inherited Assets

Assets inherited from someone who has passed away generally receive a step-up in basis to their fair market value on the date of death. In practice, this means the appreciation that built up during the deceased's lifetime is never taxed as a capital gain. If you inherit stock originally purchased for $50,000 that is worth $500,000 at the date of death, your new cost basis is generally $500,000, not $50,000.

This is one of the most important, and least intuitive, differences between inherited stock and stock you purchased yourself. If you are a sudden inheritor, the tax profile of what you now hold may be very different from what the original owner faced, and selling soon after inheriting may trigger little or no capital gains tax on the appreciation that occurred before you owned it. Our glossary entry on step-up in basis goes into more detail on how this works and where it applies.

California residents have one additional consideration. Community property generally receives a full step-up in basis on both spouses' halves at the first spouse's death, which is more favorable than the partial step-up that applies to assets held in joint tenancy. How an account is titled can therefore change the tax profile of what a surviving spouse inherits.

One important exception: inherited IRAs and other tax-deferred retirement accounts do not receive a step-up in basis. Distributions from an inherited IRA are generally taxed as ordinary income to the beneficiary, following separate rules on how quickly the account must be distributed. Treating an inherited IRA like inherited stock is a common and costly mistake.

When to Talk to a Fee-Only Fiduciary About a Capital Gains Plan

Capital gains decisions rarely happen in isolation. The right answer depends on federal rates, California rates, NIIT thresholds, charitable intent, and the rest of a household's financial picture. Those pieces have to be considered together, not one transaction at a time.

As a fee-only fiduciary, we are compensated only by our clients, not through commissions or product sales. That structure removes one common source of conflict from the conversation, which matters most on a decision like this one, where the size and timing of a sale can move a lot of money. Having financial planning, investment management, tax planning, and estate planning under one roof also means a capital gains decision gets evaluated against your full plan, not in a vacuum.

Depending on individual circumstances, a coordinated plan may help reduce the tax drag on a sale, though no advisor can guarantee a specific tax outcome or savings amount. If you are holding a concentrated position, preparing to sell a business, or working through an inheritance, the right time to start this conversation is before the sale, not after.

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Advisory services offered through Up Capital Management, Inc., an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. This material is for informational and educational purposes only, reflects the opinions of the author as of the publication date, and is subject to change without notice. It does not constitute individualized investment, tax, or legal advice, and no portion should be relied upon as a recommendation for any specific person. The examples presented are hypothetical illustrations only, are not based on any actual client, and do not reflect the experience of any Up Capital Management client. Diversification does not ensure a profit or protect against loss in a declining market. Federal and California tax rates, brackets, and rules are subject to change, and the figures cited reflect the guidance sourced and dated above. Third-party data is believed to be reliable but is not guaranteed as to accuracy or completeness. Consult a qualified tax professional and estate planning attorney regarding your specific circumstances before implementing any strategy discussed here. Past performance is not indicative of future results.