Arizona became even more attractive to investors this year. As of January 1, 2026, Arizona’s 25% long-term capital gains subtraction now applies to all assets, not just those acquired after 2011. This means every Arizona resident holding long-term appreciated assets now qualifies for the state’s reduced effective capital gains rate of just 1.875%.
For investors, retirees selling legacy positions, business owners planning an exit, and HENRYs (High Earners, Not Rich Yet) building wealth through equity compensation, this is a real-dollar savings shift in state tax regulations.
This guide will explain how Arizona capital gains taxes work in 2026, as well as specific tax-saving strategies to minimize what you owe.
Looking for personalized tax planning advice in Arizona? Contact the team at ARQ Wealth to learn how we can help you maximize your tax savings with strategic planning. Call us at (480) 214-9572.
What is Capital Gains Tax?
A capital gain is the difference between the price you buy an asset for and what you sell it for. Once you sell your assets, the gains become “realized capital gains.” A capital gains tax is a tax on this profit.
For example, if you buy a stock at a purchase price of $100 and sell it for $200, then your capital gain is $100. Your total capital gains tax liability depends on many factors, including the assets you sold, how long you owned them before selling, your taxable income, and your filing status.
There are two main types of capital gains:
- Short-Term Capital Gains: Gains from assets you held for one year or less before selling. At the federal level, these are taxed at ordinary income tax rates, which range from 10% to 37% depending on your income bracket.
- Long-Term Capital Gains: Gains from assets you held for more than a year before selling. The federal government taxes these at rates of 0%, 15%, or 20%, depending on your taxable income.
You’re typically required to pay both federal capital gains taxes and state capital gains taxes. Fortunately, Arizona takes a simplified approach.
Arizona Capital Gains Tax: 2.5%
Arizona treats all capital gains as regular income and taxes them at the flat state income tax rate of 2.5%. What makes Arizona particularly attractive is its long-term capital gains subtraction.
The state allows you to subtract 25% of your net long-term capital gains from your Arizona gross income. This effectively reduces Arizona’s long-term capital gains tax rate to 1.875% (2.5% x 75% = 1.875%).
For short-term gains, there is no subtraction. You pay taxes at the full 2.5% rate.
What Changed in 2026: Arizona’s Expanded Capital Gains Subtraction
The biggest update Arizona investors need to know about for 2026 is that Arizona recently expanded the 25% long-term capital gains subtraction to apply to all long-term capital gains, regardless of when the assets were acquired. The change takes effect for taxable years beginning on or after January 1, 2026.
Here’s what shifted:
- Old rule (through 2025): The 25% subtraction only applied to net long-term capital gains derived from assets acquired after December 31, 2011. If you couldn’t verify that an asset was acquired after that date, you couldn’t claim the subtraction.
- New rule (starting January 1, 2026): The 25% subtraction applies to all net long-term capital gains included in federal adjusted gross income. The asset’s acquisition date no longer matters.
So who benefits most from this change? Long-term investors looking to sell investments, retirees selling appreciated assets acquired decades ago, and business owners exiting companies founded before 2012.
2026 Federal Long-Term Capital Gains Tax Brackets
Arizona capital gains taxes are separate from and in addition to federal capital gains taxes. Here are the 2026 long-term capital gains tax brackets, which apply to assets held for more than one year:
| Tax Rate | Single Filers | Married Couples Filing Jointly | Married Couples Filing Separately | Head of Household |
| 0% | Up to $49,450 | Up to $98,900 | Up to $49,450 | Up to $66,200 |
| 15% | $49,451 – $545,500 | $98,901- $613,700 | $49,451 – $306,850 | $66,201- $579,600 |
| 20% | Over $545,500 | Over $613,700 | Over $306,850 | Over $579,600 |
These thresholds increased by approximately 2.7% from 2025 due to inflation adjustments under the One Big Beautiful Bill Act.
How Arizona Taxes Capital Gains: Three Examples
Example 1: Short-Term Capital Gain
You invest $10,000 in a stock and sell it six months later for $20,000, realizing a $10,000 gain. Because you held it for less than one year, it’s considered a short-term gain.
Arizona tax: $10,000 x 2.5% = $250 (no subtraction for short-term gains)
Example 2: Long-Term Capital Gain
You invest $10,000 in a stock and sell it five years later for $20,000, realizing a $10,000 gain.
Step 1: Apply Arizona’s 25% subtraction: $10,000 × 25% = $2,500. Taxable gain = $7,500.
Step 2: Apply the 2.5% tax rate: $7,500 x 2.5% = $187.50
Example 3: Pre-2012 Asset
This is the scenario that changed in 2026. Say you purchased stock in 2005 for $50,000 and sell it in 2026 for $200,000, realizing a $150,000 long-term gain.
Under the old rules (2025 and prior): This asset was acquired before December 31, 2011, so the 25% subtraction would not apply. You would owe Arizona tax on the full gain: $150,000 x 2.5% = $3,750.
Under the new rules (2026 and beyond): The 25% subtraction now applies regardless of acquisition date. Taxable gain = $150,000 x 75% = $112,500. Arizona tax = $112,500 x 2.5% = $2,812.50.
Tax savings under the new rule: $937.50 on this single transaction.
What HENRYs Should Know About Arizona Capital Gains
If you’re a HENRY (High Earner, Not Rich Yet), Arizona’s capital gains environment deserves special attention. HENRYs typically earn between $100,000 and $500,000 in household income and are typically building wealth through stock-based compensation, rental income from an investment property, or investment accounts.
This demographic often faces a unique challenge: significant paper wealth tied up in investments that will eventually need to be liquidated. When that liquidity event happens, the combined federal and state capital gains tax bill can be substantial.
It’s important for HENRYs to consider these tax implications during their life planning process.
How Does Arizona Compare to Other States?
Arizona’s effective 1.875% long-term capital gains tax rate is among the lowest in states that tax capital gains. Here’s how Arizona stacks up against other states:
- States that do not tax capital gains: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
- States with comparable rates: Arkansas taxes capital gains at a rate reaching 3.90%. Indiana taxes capital gains at approximately 3%.
- States with significantly higher rates: New York taxes capital gains at 10.90%. New Jersey taxes capital gains at roughly the same rate: 10.75%. California taxes capital gains at 12.30%.
Strategies to Reduce Capital Gains Tax in Arizona
Paying capital gains taxes is very likely if you’re selling profitable investments. But with the right planning, you can legally reduce what you owe. Here are the most effective strategies:
- Commit to holding investments for more than one year: This is the simplest and most impactful move. Holding for at least one year and one day allows your gains to qualify for both the lower federal long-term rates and Arizona’s 25% subtraction. Missing the one-year mark by even a few days means you pay higher short-term rates at the federal level and lose the Arizona subtraction entirely.
- Use tax-loss harvesting to offset gains: Selling assets that have declined in value (called capital losses) strategically can generate losses that offset capital gains. Learn more about tax-loss harvesting.
- Maximize tax-advantaged retirement accounts: Investments held within 401(k)s, IRAs, and Roth accounts or other tax-advantaged accounts aren’t subject to capital gains taxes while they remain in the account, helping you defer gains taxes.
- Time asset sales to lower-income years: Capital gains tax rates are tied to your total taxable income. If you’re transitioning to retirement, taking a sabbatical, or shifting from full-time to part-time work, those lower-income years may be an opportunity to sell appreciated assets at a 0% federal rate.
- Donate appreciated assets to charity: When you donate assets held for more than one year directly to a qualified charity, you avoid paying capital gains tax on the appreciation and receive a charitable deduction for the full fair market value of the asset (the donation is also subject to a 30% AGI limit). This could also make you eligible for the Arizona Charitable Tax Credit (one of the many tax benefits offered by Arizona).
For a deeper look at capital gains reduction strategies, read our full guide: 8 Strategies to Reduce Capital Gains Taxes.
Reduce Your Capital Gains Tax With ARQ Wealth
Arizona’s 2026 expansion of the long-term capital gains subtraction makes the state even more investor-friendly. With the acquisition-date restriction eliminated, every Arizona resident holding long-term appreciated assets now qualifies for the reduced 1.875% effective state rate.
At ARQ Wealth, we help investors and high earners develop comprehensive tax optimization strategies tailored to their unique situations. Whether you need to identify potential tax deductions, are looking to defer capital gains taxes, or build a retirement income plan that minimizes capital gains exposure, our team can help.
Schedule a free consultation with ARQ Wealth today or call us at (480) 214-9572 to start reducing your capital gains tax burden.
FAQs
What is Arizona’s capital gains tax rate?
Arizona taxes all capital gains at the flat state income tax rate of 2.5%. For long-term capital gains (assets held longer than one year), a 25% subtraction reduces the effective state tax rate to 1.875%. Short-term capital gains do not qualify for this subtraction.
What changed about Arizona’s capital gains tax in 2026?
Arizona expanded the 25% subtraction for long-term capital gains to apply to all assets, regardless of when they were acquired. Previously, the subtraction only applied to assets acquired after December 31, 2011. The change took effect for taxable years beginning on or after January 1, 2026.
Does Arizona tax short-term and long-term capital gains differently?
Not directly. Arizona taxes all capital gains as ordinary income at the flat 2.5% rate. However, long-term capital gains qualify for the 25% subtraction from Arizona’s gross income, effectively reducing the rate to 1.875%. Short-term gains do not qualify for this subtraction, so they are taxed at the full 2.5%. Your total tax burden depends on your income and filing status.
How do I know if I owe capital gains taxes in Arizona?
You owe capital gains taxes any time you sell a capital asset for more than you paid for it. This includes stocks, bonds, mutual funds, real estate, cryptocurrency, and business interests. Once you sell, the profit is typically taxed at both the federal and state levels.
Which states tax capital gains, and how does Arizona compare?
Most states tax capital gains as ordinary income under their own state tax laws. Eight states don’t tax capital gains at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Among states that do, Arizona’s effective long-term rate of 1.875% is one of the lowest in the country.
What is the net investment income tax, and does it apply on top of Arizona capital gains taxes?
The net investment income tax (NIIT) is a 3.8% federal surtax on investment income, including capital gains, dividends, and rental income, for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly).