How do you calculate health savings account (HSA) Net Capital Gain or Loss, for CA tax purposes?

As you know, California does not permit the deduction of HSA contributions. Therefore, California treats an HSA like an ordinary investment account.

Depending on what type of investments you have in the HSA, you will have the possibility of interest, dividends (qualifying or ordinary), and capital gains.

You may have to call the HSA administrator and ask if the "net investment gains" is "capital gains". Try to get an agent who is familiar with the two states that do not permit HSAs (California and New Jersey) to help you derive the numbers for interest, dividends, and capital gains. Note that since 48 out of 50 states either don't tax HSAs or don't even have an income tax, many of the agents may not be familiar with your situation.

As you may already know, you enter these amounts starting at the screen in the California interview entitled "Here's the income that California handles differently". Look down to the subheading "Investments", and click on Start (or Revisit) on the line entitled "Health Savings Account (HSA) Earnings".

The screenshot below shows you the screen on which you will enter your various earnings.

Note that since HSAs are not deductible, HSA distributions for non-medical expenses or for excess contributions are not penalized in California.

Also note that fees are deductible in California since the HSA is a regular investment account. In the same section of the menu screen as the HSA entries, you will see "Investment Income Expenses". Click on this line to be able to enter your HSA administrative fees.

[Edited 3/10/2020 3:28 pm CDT - removed Alabama]