Take a good, hard look at your state’s tax picture today, and keep an eye on what happens if you live in one of the states where Democrats seized the statehouse during last Tuesday’s election. While California’s wealth tax failed, there are other ways to tax your wealth. Capital gains taxes not only tax your real wealth gains, but can even tax fictitious gains generated by inflation. At The Tax Foundation, Nicole Fox and Cole Kellison explain, writing:
When taxpayers sell capital assets like real property or corporate stock, net earnings on those sales (capital gains) are generally subject to tax, and net losses (capital losses) can generally be deducted when calculating income tax liability.
One major shortcoming of current capital gains taxation is that the tax basis, or the purchase price of an asset, is not indexed for inflation. As a result, capital gains are measured in nominal dollars, with the original purchase price subtracted from the sale price without any adjustment for the value of money over time. This means taxpayers are taxed on a combination of real gains and fictitious income that does not reflect an actual increase in purchasing power (although the tax code provides some accommodations, such as for qualifying sales of owner-occupied homes and properties transferred to heirs). In some cases, this lack of inflation indexing can be significant enough that taxpayers owe taxes on what appears to be a capital gain on paper, but is, in real terms, a net loss.
The federal tax code partially addresses this shortcoming through the preferential treatment of long-term capital gains. Long-term capital gains, defined as net gains on assets held for more than one year, are taxed under a separate rate schedule with lower rates and different brackets. Depending on a taxpayer’s overall taxable income, long-term capital gains are taxed at rates of 0 percent, 15 percent, or 20 percent.
At the state level, accommodating the effects of inflation is less commonly seen. Thirty states and the District of Columbia overtax capital gains income simply by subjecting capital gains to the same rate schedule that applies to ordinary income.
You can get a quick view of your own state’s capital gains tax picture in The Tax Foundation’s map below:
Action Line: If you are looking for a state where your wealth is respected, and so are your rights, click here to begin your search with Your Survival Guy’s 2026 Super States.
