Many Americans earn money by selling properties, stocks or other assets. However, making money by selling assets is not easy. Different states have different tax rates and policies for short-term and long-term capital gains like Texas. Therefore, many Texans wonder what they need to know about Texas capital gains tax? Does Texas impose any tax liabilities on capital gains?
There is no state capital gains tax in Texas. This means that any profit made by selling assets in Texas will not be taxed at the state-level. However, this doesn’t mean that there will be no tax burden on capital gains.
Federal capital gains taxes may still apply depending on factors like your income, how long you held your investment and the type of investment.
This article will explain everything to know about Texas capital gains tax, what you do and don’t have to pay, and smart tax planning strategies to minimize your liabilities.
Texas Capital Gains Tax: Do You Have To Pay Taxes On Profits?
The short answer is no, Texas doesn’t impose state-level taxes on capital gains. Texas is one of the few states that doesn’t impose income tax on its residents. Whether you sell stocks, real estate, or other investments, local state government will not take a portion of your profit.
What about federal capital gains taxes?
This is where many taxpayers are often confused. They think that no state-taxes mean no taxes at all. However, states and federal governments have different laws. A state can choose to not tax or tax its residents. But federal laws apply to all states, whether they agree or not.
Therefore, even if you don’t have to pay state-level taxes on capital gains in Texas, federal taxes will still apply on your taxable income made from profits.
This means:
- You must report your gains on your federal tax return
- You may owe tax depending on:
- Your income
- How long you held the asset
In short, whatever profit you made, you will keep 100% of it. However, federal tax rules still apply. Therefore, let’s explore how much taxes you will pay at the federal-level depending on the type of your investment and how long the investment was held.
How Do Federal Capital Gains Taxes Work?
Even though Texas doesn’t tax your capital gains, the federal tax laws and the IRS still require you to report and pay federal capital gains taxes when you sell an asset or investment properties for profit.
Long-term vs Short-term capital gains
The most important factor determining your capital gains tax liability is how long you held the asset.
- Short-term capital gains (≤ 1 year)
It is taxed as ordinary income. And, tax rates are 10% to 37% depending on your income.
- Long-term capital gains (> 1 year)
It is taxed at lower preferential rates at 0%, 15% or 20%.
How Much Tax You’ll Pay (With Examples)
1. Short-term gain (higher tax)
Let’s say you held an investment for 6 months and gained a profit of $10,000. Then, short-term federal capital gains tax rates are 24%. Therefore, you will pay $2,400 in federal taxes. Good thing is that you will not pay state-taxes.
2. Long-term gain (lower tax)
Suppose, you held an investment for 2 years and made a profit of $10,000. Then, long-term capital gains tax rates will be 15%. This means that you will pay $1,500 in federal taxes.
3. Lower income taxpayer
Imagine that an investment is held for more than one year (e.g: 2 years) and made a profit of $10,000. And, your overall income is low. Then, your federal tax bracket will be 0%. This means that you will pay $0 in taxes to the IRS.
How types of investments affect tax?
Different types of assets held are taxed differently.
Stocks & ETFs
If they are short-term (less than 1 year), they are taxed at ordinary income tax rates. And, if they are long-term (greater than 1 year), they are taxed at 0%, 15% or 20%. These are the most common capital gains taxes when selling at different time periods.
Real estate
Real estate investors can qualify for an exclusion, if it is their primary residence.
- Up to $250,000 (single)
- Up to $500,000 (married)
For example:
If your gain is $200,000, then taxes will be $0 (full exemption).
Collectibles (art, coins, etc.)
Long-term gains are taxed up to 28%. It is higher than standard capital gains rates.
Crypto & digital assets
- Treated as property by the IRS
- Same rules:
- Short-term → income tax rates
- Long-term → 0%, 15%, 20%
Additional tax: Net Investment Income Tax (NIIT)
High-income taxpayers may also pay an extra 3.8% net investment income tax. It applies if the income exceeds certain thresholds defined by the IRS.
After learning how federal taxes work on different types of investments, let’s explore different investment strategies to avoid or reduce the overall tax burden incurred on profits.
How To Reduce Or Avoid Capital Gains Tax In Texas?
Although, Texas has no state capital gains taxes, federal taxes apply on different types of investments. The good news is that you can use the following legal strategies to minimize your tax liabilities. These exemptions and strategies provide tax relief to investors legally.
In some cases, credits and withholding applied to your account may effectively reduce your capital gains taxes. Understanding how the IRS applies these through Code 806 and Code 766 can help you evaluate your tax situation better.
1. Hold investments longer
As explained above, investments like stocks and ETFs held for less than a year are taxed higher than the ones held for more than one year. Therefore, one of the simplest ways to minimize taxes on capital gains is to hold longer than one year.
- Short-term → taxed at 10%–37%
- Long-term → taxed at 0%, 15%, or 20%
2. Use the 0% Capital Gains Tax Bracket
Some taxpayers can legally pay zero federal tax on long-term gains.
- Single filers → lower income threshold
- Married couples filing jointly → higher threshold
For example:
- Married couple filing jointly
- Income: $70,000
- Long-term gain: $20,000
Tax = $0 (falls under 0% bracket)
3. Offset capital gains with losses (portfolio strategy)
A smart way to reduce taxes on capital gains is to use your losses (tax-loss harvesting).
For example:
You made a profit of $12,000 from your investments, but you incurred a $5,000 loss from another investment. Therefore, your taxable income will be $7,000. IRS will not count $12,000 as your taxable income due to a $5,000 loss.
4. Use a 1031 exchange to defer capital gains tax
If you invest in properties, then a 1031 exchange allows you to defer taxes by reinvesting your profits into another property. Learn more about it in IRS’s like-kind exchange rules.
For example:
You made a profit of $100,000 by selling a property. Then, instead of reporting it for tax purposes, you use 1031 exchange to invest the entire amount into another property. As a result, you will not pay any taxes immediately.
5. Take Advantage of the Primary Residence Exclusion
If you’re selling your home, you may qualify for a major tax break defined in Topic no.701 of the IRS:
- $250,000 exclusion (single filers)
- $500,000 exclusion (married couples filing jointly)
6. Use tax-advantaged accounts in your investment portfolio
Certain accounts can help you avoid or reduce taxes.
- 401(k) → tax-deferred
- Traditional IRA → tax-deferred
- Roth IRA → tax-free growth
For example:
If you sell stocks inside a Roth IRA, then you will pay no taxes on capital gains.
7. Work with financial advisors or tax professionals
Working with financial advisors , CPAs or tax professionals can help optimize your strategy. They will recommend the best ways to avoid or reduce capital gains tax with careful planning depending on the type and duration of your investment.
8. Time your sales strategically
Selling your assets in the right year is crucial to reduce or avoid taxes altogether.
For example:
If you sell in a high-income year, the tax bracket might be 20%. And, in lower-income year, taxes could be 15% or 0%. Therefore, selling when your income is lower can reduce yourr taxes significantly.
Conclusion
This article has explained everything you need to know about Texas capital gains tax. Texas doesn’t tax capital gains. This means that whatever profit you make, you will pay $0 in state-taxes.
However, no state-taxes don’t automatically mean no taxes at all. Depending on the type and duration of your investment or asset, federal taxes may still apply. With the right strategies and timing, you can definitely reduce your taxable income. Do you have any questions? Let us know in the comments.
FAQs
Does Texas have a capital gains tax?
No. Texas does not impose a state capital gains tax because it has no state income tax. However, you may still owe federal taxes on your gains.
Do I still have to pay federal capital gains tax in Texas?
Yes. The IRS taxes capital gains at the federal level, regardless of where you live.
How much capital gains tax will I pay?
It depends on:
- How long you held the asset
- Your income level
Rates range from 0% to 20% for long-term gains, and 10% to 37% for short-term gains.
Can I avoid capital gains tax completely?
In some cases, yes. You may pay 0% tax if:
- Your income falls in the 0% bracket
- You qualify for exclusions (like selling your primary home)
Do married couples filing jointly pay less capital gains tax?
They don’t pay lower rates, but they benefit from higher income thresholds, which can keep them in lower tax brackets compared to single filers.