How states tax capital gains and passive income in 2026: California, Washington, Massachusetts, Texas and more

By the Tax Field Guide editorial team. Published 2026-10-31. Facts checked 2026-10-31. Related strategies: Tax-Loss Harvesting, Opportunity Zone Investments, Like-Kind Exchanges.

Education only; not tax, legal or investment advice. Tax rules change, and how they apply depends on your facts. No outcome is guaranteed.

Federal strategies for passive income, such as loss harvesting, deferral and depreciation, only address federal tax. State tax is a separate layer, and states treat investment income very differently. Some tax gains as ordinary income, one taxes long-term gains on their own, some have no tax on individual income, and one repealed its tax on interest and dividends. This guide uses official state sources to show how wide the range is. It is not a ranking of states or a suggestion to move.

California: gains are ordinary income

The California Franchise Tax Board says California "does not have a lower rate for capital gains. All capital gains are taxed as ordinary income."¹ So the federal distinction between short-term and long-term gains does not produce a lower California rate. California also does not conform to federal bonus depreciation under IRC §168(k), so bonus depreciation taken on solar equipment or on cost segregation components generally has to be adjusted on the California return.² See bonus depreciation and solar for the federal side, and the California page for state credits.

Washington: a separate tax on long-term gains

Washington taxes long-term capital gains through a separate tax. The Department of Revenue says the 2021 legislature created a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds and business interests. It applies only to individuals, though an individual can owe it through an interest in a pass-through or disregarded entity, and only to gains allocated to Washington.³

Beginning with tax year 2025, the rate is tiered: 7% on the first $1 million of taxable Washington capital gains and 9.9% (7% plus an additional 2.9%) above $1 million.⁴ The first return under the tiered rate was due April 15, 2026.⁴

The Department lists a standard deduction, which was $278,000 for 2025 and is adjusted annually for inflation, and exemptions that include real estate, assets held in certain retirement accounts, and assets used in a trade or business to the extent they are depreciable or qualify for §179 expensing. There is also a credit for income or excise tax paid to another jurisdiction on the same gains.³ See the Washington page.

Massachusetts: a surtax on high incomes

Massachusetts applies a 4% surtax to taxable income above a threshold, which is $1,107,750 for tax year 2026 ($1,083,150 for 2025). Only the excess over the threshold is subject to the surtax.⁵ See the Massachusetts page.

No individual income tax: Texas and Florida

The Texas Constitution (Article VIII, Section 24-a) prohibits a state tax on the net incomes of individuals.⁶ Florida's constitution prohibits a state tax on the income of natural persons who are residents or citizens, beyond amounts creditable against a similar federal tax.⁷ See the Texas and Florida pages. These rules do not change federal tax. The 3.8% federal net investment income tax, for example, still applies to residents of every state; see do tax credits reduce the net investment income tax?.

New Hampshire: interest and dividends tax repealed

New Hampshire formerly taxed interest and dividend income (at 3% for periods ending on or after December 31, 2024). The Department of Revenue Administration says that for tax periods beginning on or after January 1, 2025, taxpayers no longer have to pay the tax. It also says the repeal gives no amnesty for earlier years: returns and payments for 2024 and prior periods stay due.⁸ See the New Hampshire page.

What this means for passive-income strategies

Federal tools do not carry over automatically. A federal deduction, timing rule or exclusion may be adjusted, denied or taxed differently by the state. California's bonus depreciation rule is one example.
State rules can change the value of deferral. Deferring a gain, as with like-kind exchanges or opportunity zones, changes when federal tax is due. Whether the state follows the same timing is a separate question to check.
Loss harvesting meets state rules too. Capital losses reduce gains for federal purposes; see tax-loss harvesting. How a state treats those losses is set by that state's own rules; the Washington tax, for example, is computed under its own definitions and exemptions.
State credits are a different tool. Buying a state credit changes state tax only; see how state tax credit transfers work.
Passive-loss limits are federal. The passive activity rules in how to reduce taxes on passive income decide what offsets what on the federal return.

Browse the state tax pages for sourced incentives by state, and use how to find and vet a tax mitigation advisor before acting on any strategy.

Common questions

Does California tax capital gains at a lower rate?

No. The Franchise Tax Board says California has no lower rate for capital gains and taxes all capital gains as ordinary income.

Does Washington have a capital gains tax?

Yes. Washington taxes long-term capital gains on assets such as stocks, bonds and business interests at 7% on the first $1 million of taxable Washington gains and 9.9% above that, beginning with tax year 2025. It applies only to individuals and has exemptions, including real estate and certain retirement accounts, and a standard deduction.

Does New Hampshire still tax interest and dividends?

No, for tax periods beginning on or after January 1, 2025. The repeal has no amnesty for 2024 and earlier periods, which remain subject to audit and collection.

If I live in a state with no income tax, do I still owe federal net investment income tax?

The federal 3.8% net investment income tax is a federal tax imposed by section 1411 and applies regardless of the state where you live, if you are over the threshold and have net investment income.

Education only; not tax, legal or investment advice. State rules change; confirm with the official source and a qualified professional.

Sources

California Franchise Tax Board, Capital gains and losses, https://www.ftb.ca.gov/file/personal/income-types/capital-gains-and-losses.html
California FTB, 2025 Instructions for Form FTB 3885, https://www.ftb.ca.gov/forms/2025/2025-3885-instructions.html
Washington Department of Revenue, Capital gains tax, https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax
Washington Department of Revenue, New tiered rates for Washington's capital gains tax (June 30, 2025), https://dor.wa.gov/forms-publications/publications-subject/special-notices/new-tiered-rates-washingtons-capital-gains-tax
Mass.gov, Massachusetts 4% Surtax on Taxable Income, https://www.mass.gov/info-details/massachusetts-4-surtax-on-taxable-income
Texas Constitution, Article 8, Section 24-a, https://statutes.capitol.texas.gov/Docs/CN/htm/CN.8.htm
Florida Constitution, Art. VII, §5, https://www.flsenate.gov/Laws/Constitution
New Hampshire Department of Revenue Administration, Repeal of NH Interest and Dividends Tax Now in Effect (Jan. 23, 2025), https://www.revenue.nh.gov/news-and-media/repeal-nh-interest-and-dividends-tax-now-effect

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