Hawaii Capital Gains Tax Explained

Capital gains tax is a crucial aspect of financial planning for investors and property owners. In Hawaii, understanding how these taxes work can significantly impact your financial decisions and tax liabilities. This comprehensive guide delves into the specifics of capital gains taxation in Hawaii, compares it to federal rates, and explores strategies to manage and potentially reduce your tax burden.

What Are Capital Gains?

Capital gains refer to the profit realized from the sale of a capital asset, such as stocks, real estate, or a business. These gains are categorized into two types:

• Short-Term Capital Gains: Profits from the sale of assets held for one year or less. These are typically taxed at the individual’s ordinary income tax rate.
• Long-Term Capital Gains: Profits from the sale of assets held for more than one year. These gains benefit from reduced tax rates compared to short-term gains.

Does Hawaii Have a Capital Gains Tax?

Yes, Hawaii imposes a tax on capital gains. The state’s approach to taxing these gains is distinct in several ways:

• Tax Rate: Hawaii taxes long-term capital gains at a flat rate of 7.25%, which is lower than the state’s top marginal income tax rate of 11%. This preferential rate aims to encourage investment within the state. Hi Appleseed
• Comparison to Other States: While some states tax capital gains as ordinary income, Hawaii offers a lower rate for long-term gains. For instance, states like California tax capital gains at the same rate as regular income, with top rates reaching 13.3%. In contrast, states like Florida impose no state tax on capital gains, making Hawaii’s rate relatively moderate. Tax Foundation

Federal Capital Gains Tax Rates

At the federal level, capital gains taxes are structured to distinguish between short-term and long-term gains:

• Short-Term Capital Gains: Taxed as ordinary income. For 2025, federal income tax brackets are as follows:
  • 10%: Up to $11,925
  • 12%: $11,926 to $48,475
  • 22%: $48,476 to $103,350
  • 24%: $103,351 to $197,300
  • 32%: $197,301 to $250,525
  • 35%: $250,526 to $626,350
  • 37%: Over $626,350
• Long-Term Capital Gains: Benefit from reduced tax rates:
  • 0%: Up to $48,350
  • 15%: $48,351 to $533,400
  • 20%: Over $533,400

These brackets apply to single filers; thresholds vary for other filing statuses. 

Investopedia

How Hawaii Residents Are Taxed on Capital Gains

Hawaii residents are subject to both state and federal taxes on capital gains:

• State Taxation: As mentioned, Hawaii imposes a 7.25% tax on long-term capital gains. Short-term gains are taxed as ordinary income, with rates up to 11%. Hi Appleseed
• Federal Taxation: Depending on your income and the holding period of the asset, you’ll pay federal taxes as outlined above.

Tax Efficiency Strategies:

• Holding Period: To benefit from lower long-term capital gains rates, consider holding assets for more than one year before selling.
• Tax-Advantaged Accounts: Utilize accounts like IRAs or 401(k)s, where investments can grow tax-deferred or even tax-free.
• Offset Gains with Losses: Use capital losses to offset gains, potentially reducing taxable income.

Capital Gains Tax Planning Strategies

Effective planning can help minimize capital gains taxes. Here are strategies particularly beneficial for high-net-worth individuals and business owners:

• Tax-Advantaged Accounts: Invest through retirement accounts to defer taxes.
• Opportunity Zones: Invest in designated Opportunity Zones to defer and potentially reduce capital gains taxes.
• Renewable Energy Investments: Participate in renewable energy projects to take advantage of federal tax credits, such as the renewable energy tax credit.

Example Scenarios

Scenario 1: Utilizing a Charitable Remainder Trust (CRT)

Jane, a Honolulu resident, owns stock purchased for $200,000, now worth $1 million. Selling it would result in significant capital gains taxes. Instead, she transfers the stock into a CRT, avoiding immediate capital gains taxation, receiving an income stream, and qualifying for a charitable deduction.

Scenario 2: Investing in Renewable Energy

John, a Maui business owner, invests $500,000 in a solar energy project. This investment qualifies him for a federal renewable energy tax credit and depreciation, significantly offsetting his capital gains tax liability and generating additional cash flow.

Conclusion

Understanding and strategically managing capital gains taxes in Hawaii can lead to substantial tax savings. By leveraging state-specific rates, federal provisions, and targeted investment strategies, taxpayers can effectively minimize their liabilities. It’s advisable to consult with a tax credit consultant to tailor strategies to your unique financial situation.

For detailed information on federal capital gains taxes, refer to the IRS official guidelines.