If you’re an investor in Arizona, understanding how your capital gains are taxed is essential for effective financial planning. While capital gains tax can significantly reduce your returns, Arizona offers a unique advantage that can help lower your tax liability. Here’s what you need to know about capital gains taxes in Arizona and how you can reduce your tax burden.
What Are Capital Gains?
Capital gains refer to the profit made from selling a capital asset—such as stocks, real estate, or cryptocurrency—at a higher price than the purchase price. There are two types of capital gains:
- Realized Capital Gains: These occur when you sell an asset and capture the profit, thus triggering tax liability.
- Unrealized Capital Gains: These are gains on investments that have increased in value but haven’t been sold yet. Taxes are not due until the asset is sold and the gain is realized.
Long-Term vs. Short-Term Capital Gains
Capital gains can also be classified based on how long the asset has been held:
- Short-Term Capital Gains: Gains from assets held for one year or less are taxed as ordinary income. At the federal level, short-term capital gains are taxed at rates as high as 37% for high earners.
- Long-Term Capital Gains: Gains from assets held for more than one year are taxed at more favorable rates, depending on your income. The federal tax rates for long-term gains are typically 0%, 15%, or 20%.
Federal Capital Gains Tax Rates in 2025
Short- and long-term capital gains are taxed differently; assets held for one year or less are taxed at ordinary income rates, while longer-held assets are taxed at lower rates.
The short-term capital gains schedule matches the schedule for ordinary income, and your marginal and effective rates depend on your income and marital status, as shown below:
| Taxable income(Single Filers) | Taxable income (Married Filing Jointly) | Tax Rate |
| $0 to $11,925 | $0 to $23,850 | 10% |
| $11,925 to $48,475 | $23,850 to $96,950 | 12% |
| $48,475 to $103,350 | $96,950 to $206,700 | 22% |
| $103,350 to $197,300 | $206,700 to $394,600 | 24% |
| $197,300 to $250,525 | $394,600 to $501,050 | 32% |
| $250,525 to $626,350 | $501,050 to $751,600 | 35% |
| $626,350 or more | $751,600 or more | 37% |
Long-term capital gains, meanwhile, are taxed at a lower rate than ordinary income. Here, too, the precise rate depends on the individual’s income and marital status:
| Taxable income (Single Filers) | Taxable income(Married Filing Jointly) | Tax Rate |
| $0 to $48,350 | $0 to $96,700 | 0% |
| $48,350 – $533,400 | $96,700 – $600,050 | 15% |
| $533,400 or more | $600,050 or more | 20% |
In addition, some categories of capital assets fall entirely outside of this rubric: gains on collectibles such as art, jewelry, antiques, and stamp collections are taxed up to a maximum 28% rate.
Additionally, the Net Investment Income Tax (NIIT) of 3.8% applies to high-income individuals, specifically those earning over $200,000 (single) or $250,000 (married).
Arizona’s Capital Gains Tax in 2025
Arizona offers a favorable tax environment for investors by taxing capital gains as ordinary income. However, there’s a crucial twist: Arizona provides a 25% deduction on long-term capital gains, which effectively lowers the state’s tax rate on long-term gains to 1.875%. This means if you earn $100,000 in long-term capital gains, you will only pay state income tax on $75,000 of that amount.
For short-term capital gains, Arizona taxes them at the same rate as ordinary income, which, as of 2025, is set at 2.5%.
Case Study: How Capital Gains Taxes Apply in Arizona
Let’s walk through an example to see how this plays out for an Arizona investor.
Jenna purchased 7,000 shares of Apple stock in April 2019 at $50 per share. By January 2025, the stock price had risen to $100 per share. She decides to sell the shares, realizing a total gain of $350,000.
- Federal Taxes: Since Jenna held the stock for more than one year, her gains are considered long-term capital gains. With $350,000 in gains, she falls into the 15% tax bracket for long-term capital gains. This means she would owe $46,440 in federal taxes on her capital gains. Additionally, since her gains exceed the $200,000 threshold for single filers, she would also incur a 3.8% NIIT on the amount above $200,000, resulting in an additional $6,080 in taxes. Thus, her total federal tax liability would be $52,828.
- Arizona Taxes: Arizona taxes long-term capital gains at a reduced rate of 1.875%. After applying the 25% capital gains deduction, Jenna’s taxable long-term capital gains are reduced to $262,500. At the 2.5% state income tax rate, Jenna would owe $6,562.50 in state taxes.
Strategies to Minimize Capital Gains Taxes
Even though Arizona provides a favorable tax treatment for capital gains, there are still federal taxes to consider. To minimize your tax liability, consider the following strategies:
- Charitable Remainder Trusts (CRTs): A CRT allows you to defer capital gains taxes by transferring appreciated assets into a trust before selling. The trust itself is tax-exempt, allowing you to avoid paying capital gains taxes when the assets are sold. You will pay taxes on the distributions from the trust over time, spreading out your tax liability.
- Invest in Renewable Energy Projects: By investing in renewable energy projects, you can take advantage of government tax incentives, including tax credits and depreciation benefits, which can significantly lower your overall taxable income and reduce your capital gains tax liability.
- Oil and Gas Well Investments: These types of investments often come with substantial tax benefits, including the ability to deduct drilling costs upfront, allowing you to reduce your taxable income in the early years of your investment.
- Maximize Retirement Contributions: Contributing to tax-advantaged retirement accounts, such as IRAs or 401(k)s, can lower your taxable income. By reducing your taxable income, you may be able to reduce the tax impact of both short-term and long-term capital gains.
- Charitable Lead Annuity Trusts (CLATs): If you are charitably inclined, a CLAT allows you to receive an upfront tax deduction while making a gift to charity. You can reduce your taxable estate and gain tax benefits while supporting a cause you care about.
Conclusion
Arizona provides a favorable tax environment for investors, particularly with its low capital gains tax rate and the 25% deduction on long-term gains. However, it’s important to keep in mind that federal taxes still apply, and capital gains tax rates are influenced by your income level and the length of time you hold the investment. To minimize your tax burden, consider using strategies such as Charitable Remainder Trusts, investing in renewable energy projects, and taking advantage of retirement account contributions.
Understanding how capital gains are taxed in Arizona and the available strategies to reduce your tax liability can help you make more informed decisions and keep more of your investment returns. Always consult with a tax professional to ensure you are optimizing your tax planning strategies for your unique situation.
