The most challenging states for investors holding long-term capital gains

Investing can be a powerful tool for growing your wealth, but navigating capital gains taxes can sometimes hinder your financial progress. It's important to remember that it's not just the federal capital gains tax you need to consider—many states also impose taxes on long-term capital gains, with rates varying widely.

To help you navigate this landscape, we've compiled a list of the worst states for investors based on their top long-term capital gains tax rates. Keep in mind that these rates may not apply to investors with lower incomes, but all investors should carefully assess potential tax implications when making investment decisions.

1. California

Highest long-term capital gains tax rate: 13.3%

California is notorious for imposing high tax burdens on its wealthiest residents, including investors. With a capital gains tax rate of 13.3% on income exceeding $1 million, it ranks as the most expensive state for wealthy investors.

2. New York

Highest long-term capital gains tax rate: 10.90%

New York comes in as the second worst state for investors, with a high tax rate of 10.90% on both capital gains and earned income. While this rate applies to income above $25 million, lower earnings are often taxed at similarly high rates.

3. Minnesota

Highest long-term capital gains tax rate: 10.85%

Minnesota taxes long-term capital gains similarly to short-term gains and ordinary income. High-earning investors may face an additional 1% tax on net investment income exceeding $1 million, resulting in a top tax bracket of 10.85%.

4. New Jersey

Highest long-term capital gains tax rate: 10.75%

New Jersey follows closely behind Minnesota, with a high tax rate of 10.75% on taxable income exceeding $1 million for single filers. Even investors with as little as $75,000 in gains may face taxes exceeding 6%.

5. Washington DC

Highest long-term capital gains tax rate: 10.75%

Washington DC ties with New Jersey as the fourth worst state for investors, with a 10.75% tax rate on taxable income above $1 million. Even lower-earning investors may face high tax burdens, with rates not falling below 9%.

6. Oregon

Highest long-term capital gains tax rate: 9.9%

Oregon's long-term capital gains tax rates are below 10%, but its investment income brackets are less generous than other states. Single filers with taxable income exceeding $125,000 are subject to the 9.9% tax rate.

7. Massachusetts

Highest long-term capital gains tax rate: 9.0%

Massachusetts imposes a 5% income tax rate for most earners, but millionaires may pay significantly more due to a 4% surtax on earnings over $1 million. Short-term gains can face even higher tax burdens, with rates climbing to 12.5%.

8. Vermont

Highest long-term capital gains tax rate: 8.75%

In Vermont, long-term capital gains are taxed as regular income, with rates ranging from 3.35% to 8.75%. However, the state offers a long-term capital gains tax exclusion of up to $5,000.

9. Hawaii

Highest long-term capital gains tax rate: 7.25%

While Hawaii's long-term capital gains tax rate is higher than many states, it places lower tax burdens on investors compared to workers. All capital gains are taxed at a flat 7.25%, while earned income can be taxed at rates as high as 11%.

10. Maine

Highest long-term capital gains tax rate: 7.15%

Maine taxes long-term gains the same as earned income, with rates reaching 7.15% for investors with gains exceeding $58,050. Even lower-income taxpayers face a high tax rate of 5.8%.

Honorable Mention: Washington

Highest long-term capital gains tax rate: 7.0%

While Washington didn't make the top 10 list, it deserves an honorable mention for its capital gains tax on certain long-term gains exceeding $250,000. However, there is no capital gains tax on real estate in the state.

Before making any investment decisions, it's essential to carefully consider the potential tax implications and consult with a financial advisor to develop a tax-efficient investment strategy.