What portion of Net Capital Gain should you elect to include in investment income for California state taxes?

[EPJ]

From TurboTax Help:

“The amounts shown on the screen transferred from your federal Investment Interest Expense Worksheet (Form 4952). They represent capital gain, including net capital gain from the disposition of property held for investment, that you elected to include in federal investment income.

If you want to change the amount of net capital gain for California investment income, simply enter that amount, keeping in mind that it cannot be more than the net gain amount shown.

Generally, investment income does not include net capital gain from the sale or exchange of property held for investment. However, you may elect to include all or part of these gains in investment income. You must make the election no later than the due date of your California return. Once made, the election may not be revoked without the consent of the Franchise Tax Board.”

Comments and questions:

I did not ‘elect to include’ anything in ‘federal investment income’. I entered details of a stock sale, and that was it. I had no choice in the matter.

How do I determine the proper amount (if any) to include in California investment income?

What criteria should be used in making this determination?

[lostarky2020]

For CA tax experts: I have these same questions for my 2020 CA tax return. I've searched the instructions for Form 540 . The only references to the term "investment income" pertain to children with investment income.  The term "net capital gain" doesn't appear anywhere in the text of the instructions. Why is TurboTax presenting this option to make an election that isn't described in the instructions for Form 540?

[AmyC]

CA mostly matches up with the federal. CA does not allow a carryback loss like the federal government, which would require an altering of your CA taxable investment gains.

If you have never elected to have a carryback loss and amended prior federal return to account for a carryback loss, you would not be affected.

CA taxes all income as ordinary income, there is no separate short term, or long term rate.

@lostarky2020

[lostarky2020]

Thank you for responding to this question. It would be lovely if you could work with Turbotax to make the state tax program clearer and better for next year! 🙂

[CryptoEther10]

"What portion of Net Capital Gain should you elect to include in investment income for California state taxes?"

What is the purpose or intent of this question?

What are the consequences including net capital gain as investment income?

[lostarky2020]

I think that was a poorly worded section on the 2020 Turbotax CA 540-NR questionnaire.

For 2021, the section appears as follows, allowing you to allocate the portion of total capital gain/loss that is taxable by California:

[AmyC]

CA is looking for CA sourced income to tax. As a resident of CA, ALL capital gain or loss is taxable. It is only part-year or non-residents that need to distinguish the CA portion. Capital gain comes from investment income so that is how it should be reported for CA. CA does not have a separate tax rate for capital gains like the federal.

For example: If you are a nonresident but sold a rental house in CA, you would include the capital gain or loss from the rental sale since it was in CA. However, if the rental was in FL, you would not include it.

@CryptoEther10

[gjmoneypants]

Thanks @AmyC  for staying on top of this thread.  Again, the question is:

"Enter the portion of the net capital gain amount that you elect to include in investment income."

So just to be clear, since I am a full-time CA resident (with no carryback loss) then I should "elect" to include the entire capital gain amount in my CA investment income.

In this case I think a tip from TurboTax would be helpful regarding what the common response is from most full-time CA residents, especially when you are dealing with the very basic case of short term and long term capital gains stock sales.

[Mr_ScottC]

Amy's answer is very helpful.  The California TT form (easy steps) is confusing by using the word "Elect".  By Amy's explaiation, there should be no electing to this, it is simply the amount if the investment income (provided, and brought over from the Federal forms) that applies to California.  The California form says "Net Capital Gain to Include in Investment Income".   While accurate, it does not convey the real intent that it is trying to distinguish what portion is taxable by California, and the "Learn More" help information does not clarify this at all.

It is clear that "Elect" is the word chosen on the easy steps because that is the word used on the California form 3526, but additional information to make clear is not given.

Also, the Cal form provides a blank field to enter the amount, but it is ambiguous as to whether leaving the field blank would simply mean the whole amount will be transferred automatically.

[tdb0008]

That's right.  I'm still not clear on whether the field should be left blank (which would assume that CA would just match what I entered for Federal), or if I should enter the total Federal amount.

[JotikaT2]

Generally, California does conform to the federal treatment of capital gains and losses.  Assuming you are referring to any possible California capital gain or loss adjustments, the amount will most likely be the same per these instructions from the Franchise Tax Board.

If your question is different, please clarify specifically what your question is so we can assist you.

@tdb0008 

[geo1]

Hi @JotikaT2 the link you provided has the word "elect" in a few spots but none of those seem related to the question. 

The question is, when turbotax, for CA asks:

"Enter the portion of the net capital gain amount that you elect to include in investment income" and has a blank cell.

For those with typical capital gains from stock sales, etc, what should they "elect" to include in that cell?

1) leave the cell blank?

2) Enter "0"?

or

3) Fill in the net federal gain (which is listed in the text)?

The instructions aren't clear, at least to me, and it seems to a couple others in this thread. Thanks!

[JotikaT2]

It will depend.

Most of the customers in this thread appear to have either a part-year resident state return or a nonresident CA state return.

Essentially, any amounts reported as belonging to California will be determined based upon your residency within the state, or if a nonresident, the income earned from California sources while a nonresident.  

For example, if you invested in a stock but were a nonresident of California, most likely, your investment income would be sourced to your state of residence and not California.  In this situation, you would enter zero for the California amount.

However, if you sold property that was located within California, then all of the capital gain allocated to that specific property would be reported on your nonresident California return.  If this was the only capital gain reported on your federal return, then the amount reported on your nonresident California return will match the amount of the federal gain.  

@geo1 

[CATarHeel]

Hi JotikaT2

As a fulltime California Resident with some capital gains from stocks, how do I answer the following for California in TurboTax?

"Net capital gain amount to include in investment income" 

1) leave the cell blank?

2) Enter "0"?

or

3) Fill in the net capital gain from Federal (this figure is provided in the text)?

Thank you!

[MarilynG1]

Yes, for a California Resident, enter the same amount from your Federal return as 'net capital gain to include in investment income'.  CA conforms to Federal rules in this instance (stock sales), so no adjustment to that amount is needed.

Here's more info from CA FB Capital Gains.

@CATarHeel