Q. When I sell it will I be required to pay federal and state income tax as well as capital gains tax?
A. Not exactly. You will pay federal and state income tax on the profit you make on the sale, instead of (not in addition to) capital gains tax. If you don't make a profit, you can deduct the loss.
As others have said, for you (a contractor) this is business income, not an investment. The profit will be taxed at ordinary income rates, not capital gains. The materials and the sales tax paid on them are considered "Cost of Goods sold" (COGS), sometime categorized as "inventory."
If your business is a sole proprietorship, you will also pay self employment tax (up to certain amounts). Self employment tax" (SET) is how you pay social security & Medicare tax, on earned income when none was withheld.
