Capital gains tax is a tax on income received from the sale of an asset—such as a business, real estate, your home, stocks, bonds, coin collections, and jewelry. Capital gains tax is paid on the financial gain between the amount you paid for (or invested to build) the asset, and the amount for which it is sold.

The rate (percentage) paid as capital gains tax has traditionally been lower than the rate (percentage) paid on income tax. And the Internal Revenue Service (IRS) has traditionally taxed long term gains differently than short term gains—with the distinction based on how long the taxpayer owned or held the asset.

In California, capital gains are taxed as regular income at the state level, meaning they are subject to California's income tax rates, which range from 1% to 13.3% depending on the taxpayer's income bracket. This is in contrast to the federal treatment of capital gains, where long-term gains (on assets held for more than one year) are taxed at lower rates than short-term gains (on assets held for one year or less). The federal long-term capital gains tax rates are 0%, 15%, or 20% depending on the taxpayer's income, with certain high-income individuals also subject to an additional 3.8% Net Investment Income Tax. It's important to note that California does not distinguish between short-term and long-term gains for tax purposes; both are taxed at the same rate as ordinary income. Taxpayers in California must also consider the potential impact of the federal Alternative Minimum Tax (AMT) and the Net Investment Income Tax, as well as any applicable exclusions or deductions, such as the exclusion of gain from the sale of a primary residence up to certain limits.