The current work explores the effects of racial miscategorization (incongruence between other people's racial categorization of an individual and that individual's racial self-identification) and subjective well-being of multiracial individuals in Hawai'i versus California. We set out to examine how multiracial individuals experience racial miscategorization in more or less ethnically diverse environments and how this experience shapes the extent to which they feel a sense of belonging and inclusion. The study consisted of interviews with 55 multiracial undergraduate and graduate students conducted in Hawai'i (20 self-identified women and 9 self-identified men, with ages ranging from 18 to 47 years; M = 22.93, SD = 6.40) and California (16 self-identified women, 9 self-identified men, and 1 self-identified gender nonbinary person, with ages ranging from 18 to 31 years; M = 20.96, SD = 2.76). Thematic analysis identified two central themes relevant to subjective well-being: (a) racial miscategorization and its consequences and (b) contextual differences in the experiences of miscategorization. Results suggest that racial miscategorization is a pervasive experience among multiracial people and is associated with negative psychological well-being. We also found that environments with greater representation of multiracial individuals, such as Hawai'i, are associated with less racial miscategorization, more inclusion, and better psychological well-being among multiracial individuals. Racial miscategorization is a prominent and aversive experience among multiracial individuals, but multiracial environments can serve as a psychological buffer. Racial miscategorization has important theoretical and practical implications for racial and ethnic identity research, which we discuss. (PsycInfo Database Record (c) 2021 APA, all rights reserved).