For those with a lot of assets, the puzzle of how to handle their wealth includes capital gains taxes. These taxes are a challenge to California residents because of the way that the state taxes.
If capital gains are made in a federal system, they are taxed differently, depending on whether they are long or short-term, but in California they are treated as normal income and taxed accordingly.
As a California resident and operating from California, it is necessary to know the nuances of California taxation to protect wealth and meet both California and Federal tax requirements.
What Are Capital Gains Taxes?
Profits made from selling an asset for more than one paid for it incur capital gains taxes. Real estate, stocks, businesses, and other investments are these assets. At the federal level, capital gains are categorized into two types based on how long the asset was held before it was sold:
Short-Term Capital Gains
Assets held for less than a year. These gains are taxed as regular income on your income tax bracket like a salary or wages.
Long-Term Capital Gains
Long-term assets. Lower tax rates from 0% to 20% depending on the income benefit these gains.
But California takes a different approach. So let’s take a closer look.
California’s Approach to Capital Gains Taxes
California taxes capital gains at the same rates as regular income, with no difference between short-term and long-term gains. This is a departure from federal standards, which distinguish based on how long the asset was held.
(We should add, California’s tax system is progressive, with the rate climbing with income: 1% for the lowest earners and 12.3% for the highest.) There is also a 1% surtax on incomes in excess of $1 million, so called the mental health services tax, that raises the top effective rate to 13.3%.
The implications are substantial for those who earn substantial capital gains. The taxpayer adds every dollar of profit from the sale of assets – real estate, stocks, or other investments – to his or her annual income.
It can make people pay into higher brackets, and raise the amount of overall tax they pay. This structure is something high-net-worth individuals should be aware of, as it can result in an outsized tax liability.
For instance, if a person has another source of income, let’s say regular income, of $100,000 and capital of gains of $200,000, the total income in that year would be $300,000.
This amount would put it in a higher tax bracket under the California tax system, in which a huge portion of its income would fall under rates of 9.3% – to 12.3%, with an additional 1% surcharge, should total income surpass $1 million.
Federal Capital Gains Taxes
Unlike California, the federal government treats short-term and long-term capital gains differently and taxes them at different rates depending on how long an asset is held before it is sold.
Short-Term Capital Gains
Capital gains from the sale of assets held for less than a year are short-term. You need to pay taxes on these gains as ordinary income; meaning, taxed at the same tax brackets as wages or salaries.
Take, for example, a single taxpayer making between $44,726 and $95,375 in 2024, who would pay a 22% federal tax rate on their short-term capital gain. The higher your income, the higher the tax rate you may pay.
Long-Term Capital Gains
Assets held for more than a year before being sold are subject to long-term capital gains. However, lower preferential tax rates on these gains, which are less than the tax on short-term gains or ordinary income, give these gains special treatment.
Long-term gains are taxed at 15% for most taxpayers. But long-term capital gains of those with higher incomes could be taxed at 20%, while those with lower incomes could qualify for a 0% rate.
For instance, in 2024, a single filer would pay 15% on long-term capital gains between $44,626 and $492,300. Those earning less than $44,626 would pay no federal taxes on their long-term gains meanwhile. On the other hand, high earners with long-term capital gains above $492,300 would pay the 20% rate.
Key Differences Between California and Federal Capital Gains Taxes
The starkest difference is in how each system treats the duration of asset ownership. All capital gains in California are treated the same as ordinary income, no matter how long the asset was owned. Why? Because tax rates are higher on long-term gains than under the federal system, where lower rates encourage holding assets over long periods.
It’s also true that a combination of California’s top tax rates and federal taxes can mean big tax bills. For high–net–worth individuals with substantial increases, that could mean an effective tax rate in excess of 30%.
Planning Ahead
California is particularly strict about taxing capital gains, and the interplay with federal rules means it’s important to do tax planning. Holding investments for the long term to benefit from federal tax breaks, using tax-advantaged accounts, or using a loss to offset gains are some of the strategies that will help minimize the tax roadblock.
If you have a lot of assets, you need advisors who understand California’s progressive tax system and federal tax law. What primarily sets us apart at Dominion is the wealth strategy design expertise: planning how to best protect assets and optimize tax efficiency across jurisdictions. Proper planning can make the difference between keeping your wealth and watching it erode away due to California’s high tax rates.
Strategies to Mitigate Capital Gains Taxes in California
Capital gains tax experienced should be the minimum while effective planning is necessary. While the state’s tax structure is stringent, there are strategies to reduce your overall liability:
Offset Gains with Losses
By offsetting underperforming investment losses against taxable gains, it’s possible to reduce the amount of income subject to tax. The tactic is called tax-loss harvesting – effectively applying losses the asset may incur from another to offset gains, thus reducing overall tax.
Choose Long-Term Investments
While California taxes all gains as regular income, federal tax advantages can be had by holding assets for more than a year. Your overall tax burden is reduced because federal long-term capital gains rates are much lower than short-term rates.
Use Tax-Deferred Accounts
Assets placed in tax-deferred accounts, like IRAs and 401(k)s are free from capital gains taxation until the assets are withdrawn. Just look at the 1099 Contractor, through whom a client charges you for projects you do; this can translate to immense savings, especially for high-income earners.
Create Trusts in Great Jurisdictions
If you have large amounts of wealth to manage, you can create a trust in a tax friendly jurisdiction to protect you from too much taxation. Dominion’s specialty is analyzing jurisdictional advantages to achieve the best asset protection and tax efficiency.
Potential Changes to Capital Gains Taxes
Federal tax laws are constantly changing, with capital gains taxes a frequent topic of debate in this year’s presidential campaign. For instance, recent federal proposals would bring long-term capital gains rates into line with ordinary income rates for high earners.
These changes illustrate the need to work with professionals who can envision and respond to fluctuations in the tax sea.
Why Expertise Matters
Federal and state regulations can be at odds at times and mistakes expensive. Your wealth is protected through careful planning and proactive strategies, Dominion’s evidence based approach.
We operate with complete objectivity, without jurisdictional or political bias, unlike many in our industry. We are agile through a network of legal and financial experts around the globe and able to anticipate future challenges.
Strategic Considerations for California’s High-Tax Environment
California is one of the most taxing states in the country for capital gains, pairing rates with the state’s progressive income tax brackets. Strategic planning is critical for high earners to protect and grow wealth, as they are hit hard.
Asset sales timed carefully during lower income years can slice more of the piece of the pie that is subject to higher tax rates. Another way to avoid taxes on gains and get deductions is to make charitable donations of appreciated assets.
For those looking for a big break, they can move to one of the states that has no capital gains tax, such as Texas or Florida, but California’s strict residency rules have to be closely followed.
Expansion of the available tools to minimize liabilities and to protect wealth also can be secured through the establishment of trusts in tax-advantaged jurisdictions and through use of tax-deferred accounts such as 1031 exchanges.
California’s taxes are involved and not simple. Dominion offers tailored strategies, with evidence based tactics, to defend assets across jurisdictions. Contact us today to protect your financial future.
Combat Tax Gains with Dominion
California’s capital gains taxes are a serious problem for people with a lot of assets. The good news is that, with the correct strategies and with expert guidance, the impact of these taxes can be minimized and your wealth may be preserved.
Dominion is uniquely situated to deliver the custom solutions needed for real financial peace of mind. We have decades of experience behind us, and our approach is the most sophisticated and secure approach available to clients.
Discuss your wealth protection strategy with Dominion today.
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