How Capital Gains Are Taxed Federally

At the federal level, the rules are the same no matter where you live. Short-term gains (assets held less than a year) are taxed as ordinary income at rates up to 37%. Long-term gains get preferential rates under 26 U.S.C. § 1(h): 0%, 15%, or 20% depending on your taxable income. Most high earners land in the 20% bracket.

On top of that, the net investment income tax adds 3.8% for filers with modified AGI above $200,000 (single) or $250,000 (joint) per 26 U.S.C. § 1411. That makes the maximum federal rate on long-term capital gains 23.8%. This part doesn’t change whether you’re in Manhattan or Miami.

What New York Adds to That Bill

New York State taxes capital gains as ordinary income. There is no preferential rate for long-term gains at the state level. The top marginal rate hit 10.9% after the 2021 budget deal, applying to taxable income above $25 million, though rates above 9% kick in much earlier.

NYC residents get an additional layer. The city’s income tax tops out at 3.876% and applies to all types of income, including capital gains. Combined, a high-income NYC investor faces a marginal rate on capital gains of roughly:

• Federal: 20% + 3.8% NIIT = 23.8%
• New York State: up to 10.9%
• New York City: up to 3.876%
• Total: up to 38.576%

Compare that to a Florida resident paying just the 23.8% federal rate. The gap is 14.776 percentage points. On a $2 million gain, that’s $295,520 in additional state and city taxes that simply don’t exist in Florida.

Why People Actually Move

The pandemic gave a lot of New Yorkers the flexibility to work from anywhere, and the tax math did the rest. Florida saw a net migration gain of over 318,000 people from New York between 2020 and 2023. Not all of that was tax-driven, but the numbers accelerate sharply among high-income households.

The trigger is usually a liquidity event. Someone is about to sell a business, exercise a large block of stock options, or close on a real estate portfolio. They run the numbers and realize they can save six or seven figures by establishing Florida residency before the sale closes. That’s not a marginal consideration — it changes the entire financial outcome of the transaction.

Florida’s appeal goes beyond income tax. The state has no estate tax either. New York’s estate tax exemption is roughly $6.94 million, and it has a “cliff” — if your estate exceeds the exemption by more than 5%, the entire estate is taxed, not just the amount above the threshold. Florida has none of that.

The Residency Change Isn’t Automatic

New York doesn’t let go of taxpayers easily. The state uses two tests to determine tax residency: domicile and statutory residency. You can be taxed as a New York resident if you maintain a “permanent place of abode” in the state and spend more than 183 days there, even if you’ve declared domicile somewhere else.

Getting the move right requires more than a Florida mailing address. You need to:

• Actually live in Florida for the majority of the year — 183+ days, documented
• Give up or rent out your New York apartment (keeping it as a pied-a-terre can be the thing that sinks your claim)
• Move your doctors, dentists, accountant, and attorney to Florida
• Register to vote, get a driver’s license, and register vehicles in Florida
• File a Declaration of Domicile with the Florida county clerk

New York’s auditors look at the “near and dear” test — where you keep your family photos, pets, valuables, and sentimental items. We’ve seen audits hinge on where someone’s dog lived. That’s not an exaggeration.

Timing the Move Around a Big Gain

If you’re planning to sell a business or large stock position, the timing of your residency change matters enormously. New York taxes residents on worldwide income per 20 NYCRR § 105.20, so any gain realized while you’re still a New York resident gets taxed at full state and city rates.

The cleanest approach: establish Florida domicile at least one full tax year before the liquidity event. That gives you clean filing positions and reduces audit risk. Moving in January and selling in December of the same year is possible but invites closer scrutiny.

Partial-year residency is an option too. New York allows you to file as a part-year resident, allocating income to the period before and after the move. But gains from stock and other intangible property are generally sourced to your domicile on the date of sale, so getting the domicile change nailed down before the closing date is what matters most.

Sources

• IRS — Topic 409, Capital Gains and Losses
• 26 U.S.C. § 1(h) — Capital Gains Tax Rates
• 26 U.S.C. § 1411 — Net Investment Income Tax
• NY DTF — Income Tax Rate Schedules
• NY DTF — Nonresident and Part-Year Resident FAQ
• 20 NYCRR § 105.20 — New York Resident Income