You sell an investment you have held for years. The federal government charges you a preferential rate — 0%, 15% or 20% — because it is a long-term capital gain.
Then your state charges you its ordinary income rate on the same money, because thirty-six of the fifty states have no capital gains preference at all.
That surprises people, and it surprises them at the worst moment: the year of a large sale, when the bill arrives already larger than expected. The federal preference is a federal rule. Nothing requires a state to copy it, and most do not.
A note before you start. This is general education, not tax advice. Every state figure here comes from this site's own fifty-state income-tax dataset, which records each state's capital gains treatment — the kind, any exclusion percentage, any preferential rate, and the statutory basis — with a citation per state. Rates are for tax year 2026 and several states are mid-phase-down, so a figure that is doing real work in your decision is worth confirming against your own state's department of revenue before you act on it. Federal figures are for 2026. State legislatures revise this area regularly.
1. The default is: no break at all
Thirty-six states tax a long-term capital gain exactly as they tax wages.
The structural reason is worth understanding, because it explains why the default is so common. Most states begin their calculation from a federal figure — federal adjusted gross income, or federal taxable income. A net capital gain is already inside that number, at 100%, because the federal preferential rate is applied later as a separate rate calculation rather than by excluding income.
So unless a state legislates a specific subtraction or a specific rate, the gain simply flows through and gets taxed at whatever the state charges on everything else. Doing nothing produces "taxed as ordinary income."
That is the position in California, New York, Illinois, Ohio, Michigan, Virginia, Georgia, Colorado, Connecticut, Massachusetts, Minnesota, Oregon, Utah and twenty-three others.
2. The eight that charge nothing
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming tax a capital gain at nothing — not because they have a capital gains policy, but because they have no individual income tax for a gain to flow into.
The distinction matters if you are comparing states. These are not states that have chosen to favour investment income. They have chosen not to tax income, and gains are incidental beneficiaries. The money is raised through property and sales taxes instead, which is a different guide.
New Hampshire is worth a footnote: it historically taxed interest and dividends while never taxing wages or gains, and that tax has been wound down. A capital gain was never within its scope.
3. The five states that give a real break
Only five states have legislated an actual long-term capital gains preference, and they use two different mechanisms.
An exclusion — a share of the gain is simply not taxed
| State | Excluded |
|---|---|
| Arkansas | 50% of net long-term gain |
| Wisconsin | 30% |
| Arizona | 25% |
Wisconsin's is the broadest of the three: it is not carved back for publicly traded securities, so it applies to an ordinary brokerage portfolio. Arizona's survived the state's move to a flat tax, which was a specific policy decision rather than an oversight.
A rate cap — the gain is taxed, but at a lower rate
| State | Capped at |
|---|---|
| Hawaii | 7.25% |
| Montana | 4.1% |
These are genuine exceptions to the "ordinary income" rule. Hawaii's is a rate cap rather than an exclusion, which means it bites hardest for high earners whose ordinary rate is well above 7.25%.
4. Vermont, which looks like a sixth and mostly is not
Vermont's record carries a 40% exclusion, and it is the most misleading number in this entire subject.
The exclusion is carved back for publicly traded securities — which is precisely what a brokerage account holds. In practice it applies to a narrow set of assets, and a retiree selling index funds will not get it.
If you have read a ranking that lists Vermont among the capital-gains-friendly states, that is where it came from. Treat the 40% with care and check whether your specific asset qualifies before planning around it.
5. Washington, the sharp exception
Washington has no individual income tax and taxes capital gains anyway.
Chapter 82.87 RCW imposes a 7% excise tax on individual long-term capital gains above an annual exemption of $278,000.
Two things follow, and they point in opposite directions:
For most people it is irrelevant. A gain has to clear $278,000 in a single year before a dollar of it is taxed, which excludes the overwhelming majority of sales.
For a single large event it is very relevant indeed. Selling a business, a long-held concentrated position, or a property held outside a retirement account can clear that threshold in one transaction — and a state widely described as having "no income tax" then charges 7%.
It is structured as an excise rather than an income tax, which is why it coexists with the state's constitutional position on income taxation.
6. What it costs, on a real gain
A $100,000 long-term capital gain, state tax only, ignoring the federal layer:
| State | Treatment | State tax |
|---|---|---|
| Florida, Texas, Nevada, Wyoming, and the other no-income-tax states | None | $0 |
| Montana | Rate capped at 4.1% | $4,100 |
| Arkansas | 50% excluded, then ordinary | about half the ordinary rate |
| Hawaii | Rate capped at 7.25% | $7,250 |
| Washington | Below the $278,000 exemption | $0 |
| Pennsylvania | Ordinary, flat 3.07% | $3,070 |
| Ohio | Ordinary | on the full $100,000 |
| California | Ordinary, up to 12.3% | up to $12,300 |
The spread is the whole point. The same sale, the same asset, the same holding period — and a five-figure difference decided by nothing but the state on your return.
See what your own state charges on your retirement income7. The two gains most people actually have
Before going further it is worth naming what a typical household's capital gains actually consist of, because the answer changes which of the rules above matter.
A house
The largest gain most people ever realise, and the one with the most generous federal treatment: a substantial exclusion on the gain from selling a main home you have owned and lived in for long enough, with a larger amount for a married couple.
Most states follow the federal exclusion, because they start from a federal figure that already has it applied. Which means a typical home sale produces no state capital gains tax either — the gain never reaches the state return.
The exception is the gain above the exclusion. For someone in a market where a long-held home has appreciated by more than the exclusion covers, the excess is a straightforward capital gain and everything in this article applies to it. In an expensive market with a house bought decades ago, that excess can be very large.
A brokerage account
The gain the rules above were written for. Index funds, individual shares, anything held outside a retirement wrapper.
Two things make it easier to manage than a house. You can sell part of it, which means you can spread the gain across tax years. And you can choose which lots to sell, which means you can pick high-basis shares to realise less gain — provided you tell your broker which lots at the time of sale rather than accepting the default.
Specific-lot identification is the single most under-used tool here, and it is free. Most brokers default to first-in, first-out, which sells your oldest and usually lowest-basis shares — the ones with the largest embedded gain.
And one that is not a capital gain at all
Money coming out of a traditional 401(k) or IRA is ordinary income, no matter what the account was invested in or how long you held it. The wrapper converts the character of the return.
That is one of the quiet costs of a traditional retirement account, and it is the reason a taxable brokerage account is not simply a worse version of one.
8. Short-term gains, which almost nobody asks about
Everything above concerns long-term gains — assets held more than a year. The short-term picture is simpler and worse.
Federally, a short-term gain gets no preference at all. It is taxed as ordinary income, at your full marginal rate, exactly like a wage.
At state level it is the same in every one of the fifty. The five states with a long-term preference apply it to long-term gains specifically — an Arkansas 50% exclusion, a Hawaii 7.25% cap, a Montana 4.1% cap are all long-term provisions. Sell at eleven months and you get none of it.
Which makes the holding period a genuine, checkable decision rather than a technicality. On a $100,000 gain in Hawaii, crossing from short-term to long-term moves the state rate from the ordinary schedule to a 7.25% cap — and moves the federal rate from ordinary to preferential at the same time. Two rate changes on one date.
The practical rule: before selling anything held close to a year, check the purchase date. It is the cheapest tax planning available and it takes thirty seconds.
Washington's excise applies to long-term gains specifically, so a short-term gain there is genuinely untaxed by the state — one of the few places the short-term treatment is better.
9. Why this hits retirees hardest
A capital gain is usually the largest single-year income event in a retirement, and it arrives on top of everything else rather than instead of it.
Three interactions make it worse than the headline rate suggests.
It stacks. The gain sits on top of your Social Security, your pension and any withdrawals — so it is taxed at the rate that applies to your top dollars, not your average.
It can make more of your Social Security taxable. A gain raises the income figure that decides how much of your benefit is taxed, which means a sale can cost you tax on money you did not sell.
And it can raise a Medicare premium two years later. The IRMAA surcharge is assessed on income from two years prior, so a large sale in 2026 shows up as a higher premium in 2028 — after the year that caused it has closed.
None of those three appears in a table of state capital gains rates, and together they routinely exceed it.
10. The federal 0% band, which still exists underneath all this
Everything above is the state layer. Underneath it, the federal system still has a 0% long-term capital gains rate for taxpayers below a taxable-income ceiling.
For a retiree with modest ordinary income, that band is genuinely usable — and it is the basis of gain harvesting: deliberately realising gains while the federal rate is zero, then immediately repurchasing, which resets your cost basis upward at no federal cost.
Two cautions.
Your state may still charge. If you live in one of the thirty-six ordinary-income states, a gain harvested at 0% federally is not free — it is free federally and taxed at your state rate. That does not necessarily make it a bad move, but it changes the arithmetic.
And ordinary income eats the band from below. Every dollar of pension or traditional withdrawal pushes a dollar of gain out of the 0% rate. The two decisions are connected, which is why they belong in the same annual review rather than in separate ones.
11. The states that are moving
This is a subject in motion, and a figure from an article written three years ago is a poor guide to what your state charges now.
Several states are mid-phase-down on their ordinary rates, which changes the capital-gains answer without any capital-gains legislation at all — because in thirty-six states the gain is taxed at the ordinary rate, whatever it currently is. A state cutting its income tax is quietly cutting its capital gains tax too.
Others have moved to flat taxes, which compresses the range: a state that once taxed a large gain at a top graduated rate may now tax it at a single lower one. Arizona is the instructive case, because its 25% capital gains exclusion survived the move to a flat tax rather than being folded into it.
And the preferences themselves get revisited. An exclusion is an expensive line in a state budget, visible and easy to price, which makes it a recurring candidate when revenue is tight.
The practical reading:
Do not plan a sale years ahead on today's state rate. Confirm it in the year you sell.
Treat "no income tax" as more durable than "generous exclusion." A state without an income tax would need to create one; a state with an exclusion needs only to amend it. Washington's excise is the demonstration that even the first category can change.
And check the year on anything you read. This area has moved more in the last five years than in the twenty before them.
12. What to actually do about it
Know which of the five categories your state is in. Ordinary, none, exclusion, rate cap, or Washington's excise. It takes one lookup and it changes how you think about every future sale.
Check your federal band before assuming 15%. A retiree with modest ordinary income is frequently in the 0% band, and people plan around a rate they are not paying.
Spread a large sale across tax years where you can. A position sold over two years is two smaller gains, each stacking on less — which matters for the Social Security and IRMAA interactions more than for the rate itself.
Time a sale around a move, if one is happening anyway. The state that taxes a gain is generally the one you are resident in when you realise it — and the part-year rules in the year of a move are specific enough to be worth advice.
Use specific-lot identification. Tell your broker which shares to sell rather than accepting the default first-in-first-out, which sells your lowest-basis shares and realises the largest gain. It costs nothing and it has to be done at the time of sale.
And do not let the tax decide the investment. A concentrated position you should sell is a concentrated position you should sell. The tax is a cost of a good decision, not a reason to avoid making it.
13. One thing this article cannot tell you
Whether the state rate is the number that should decide anything.
For most sales it is not. A $100,000 gain in an ordinary-income state might cost $3,000 to $12,000 in state tax — real money, and considerably less than the swing in the asset's own value over the period you are deciding whether to hold it.
The tax is a cost of a decision, not the decision. A concentrated position that represents genuine risk is worth selling at almost any state rate. A well-diversified holding you were going to keep anyway does not become worth selling because your state gives an exclusion.
Where the state rate genuinely should influence you is narrower than it first appears: choosing which year to realise a gain, choosing which lots to sell, and deciding whether a sale should wait until after a move that is happening regardless. Those three are real, they are actionable, and they are where the figures above earn their place.
Everything else is the investment question, and it is a different one.
Frequently asked questions
Does my state give the same 0%, 15% and 20% rates the federal government does? Almost certainly not. Thirty-six states tax a long-term gain as ordinary income, at the same rate they charge on wages. Only five give a genuine preference, and eight charge nothing because they have no income tax at all.
Why do most states tax gains as ordinary income? Because of how their calculations are built. Most states start from a federal figure that already includes the net capital gain at 100%, and the federal preference is applied afterwards as a separate rate calculation. Unless a state legislates its own subtraction or rate, the gain simply flows through and is taxed like everything else.
Which states actually give a break on long-term gains? Five. Arkansas excludes 50% of the net gain, Wisconsin 30% and Arizona 25%. Hawaii caps the rate at 7.25% and Montana at 4.1%. Wisconsin's is the broadest because it is not carved back for publicly traded securities.
What about Vermont's 40% exclusion? It is carved back for publicly traded securities, which is what most brokerage accounts hold. Rankings that list Vermont as capital-gains-friendly are usually quoting the headline percentage without the carve-back. Check whether your specific asset qualifies before planning around it.
Washington has no income tax — why would it tax my gain? Because the tax is structured as an excise rather than an income tax. Chapter 82.87 RCW charges 7% on individual long-term gains above a $278,000 annual exemption. Below that threshold it does not apply at all, which is why most residents never encounter it.
Does moving before a sale help? It can, and it is a question for a professional rather than a rule of thumb. The state that taxes the gain is generally where you are resident when you realise it, but a move creates part-year residency with specific sourcing rules, and the state you left may take an interest in the timing. Advice before the sale is worth considerably more than advice after it.
What is gain harvesting? Deliberately realising gains while your federal long-term rate is 0%, then immediately repurchasing. You pay no federal tax and your cost basis resets upward, reducing the tax on every future sale. Your state may still charge, and ordinary income eats into the 0% band from below.
Does a capital gain affect my Medicare premium? Yes, and with a two-year lag. The IRMAA surcharge is assessed on your income from two years earlier, so a large sale in one year raises a premium two years later — by which time the year that caused it has closed and cannot be changed.
What to do next
Find out which category your state is in, then check your own federal band before assuming a rate. Those two facts decide almost everything about how you should time a sale.
- Retirement state tax calculator — what your state charges on your retirement income, cited per state
- Effective vs. marginal tax rate — where a gain would actually land in your brackets
- The Retirement Withdrawal Order Playbook — how a gain interacts with Social Security, IRMAA and the 0% band
- The Relocation Tax Playbook — if the spread above made you think about moving