States Where You Can Avoid Taxes on Capital Gains, Dividends, and Investment Income
| State Category | Capital Gains & Income Policy | Investor Impact |
|---|---|---|
| Zero State Income Tax States | Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming | 0% state tax on equity sales, dividends, and investment profits; federal taxes still apply. |
| Missouri (Unique Deduction Model) | Taxes wage income up to 4.7%, but allows a 100% deduction on capital gains | Exempts capital gains from state tax; dividend and interest earnings remain fully taxable. |
| Tax-Increasing Jurisdictions | Washington State (up to 9.9%) and Maryland (2% capital gains surtax) | Higher tax liabilities on large stock sales and high earners to cover state budget deficits. |
| High-Tax Benchmark (California) | Treats capital gains as ordinary income, taxing top earners up to 13.3%+ | A $500,000 asset gain can incur up to $66,500 in state taxes alone for high income filers. |
Where you reside when liquidating appreciated assets can dramatically alter your total tax obligation. While most US states tax investment gains alongside regular wage income, nine states allow investors to avoid state-level capital gains taxes entirely.
The Nine States Free of State Capital Gains Tax
Eight states do not levy personal income tax on wages or investment gains, offering a 0% state tax rate across the board:
- States with No Individual Income Tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming have no individual income tax structures. New Hampshire taxes interest and dividend income but fully exempts capital gains.
- Missouri's Hybrid Policy: Missouri represents a unique case. While the state taxes general wages and corporate income up to 4.7%, a state law permits taxpayers to deduct 100% of qualified capital gains from their state returns.
- Relocation Savings: Selling $500,000 in appreciated stock in a high-tax state like California can trigger tens of thousands in state liabilities, whereas executing the same sale in Texas or Florida incurs $0 in state capital gains tax.
States Raising Capital Gains Tax Rates
While select states promote low tax burdens, others are increasing revenue levies on investment profits:
- Washington State Surtax: Despite having no state income tax on wages, Washington introduced a 7% tax on long-term capital gains exceeding statutory thresholds, with top rates reaching up to 9.9% for high-value asset sales.
- Maryland Capital Gains Surtax: Addressing state budget shortfalls, Maryland enacted a permanent 2% surtax on net capital gains for high-income taxpayers.
- Policy Divergence: State fiscal policies are diverging, creating distinct tax advantages based on geographic residency.
Federal Capital Gains Rules Still Apply
A 0% state capital gains tax rate eliminates state-level duties, but federal tax liabilities remain fully active:
- Federal Rate Tiers: Long-term capital gains (assets held over one year) are taxed federally at 0%, 15%, or 20% depending on taxable income levels. Short-term gains are taxed at ordinary federal income rates up to 37%.
- Net Investment Income Tax (NIIT): High earners face an additional 3.8% NIIT surtax if modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (married filing jointly).
- Alternative State Revenue Sources: States with 0% capital gains taxes often offset lost revenue through higher sales taxes, property tax assessments, or energy sector royalties.
Frequently Asked Questions About State Capital Gains Tax
Does living in Florida completely eliminate capital gains tax?
Florida imposes zero state-level capital gains or individual income tax. However, federal capital gains taxes and NIIT surtaxes still apply to all qualifying gains.
Are dividend earnings taxed differently than capital gains in Missouri?
Yes. Missouri allows a full state tax deduction specifically for capital gains, while dividend income and interest remain subject to standard state income tax rates up to 4.7%.