State Tax Rates on Long-Term Capital Gains, 2026

When taxpayers sell capital assets like real property or corporate stock, net earnings on those sales (capital gains) are generally subject to tax, and net losses (capital losses) can generally be deducted when calculating income tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. liability.

One major shortcoming of current capital gains taxation is that the tax basis, or the purchase price of an asset, is not indexed for inflation. As a result, capital gains are measured in nominal dollars, with the original purchase price subtracted from the sale price without any adjustment for the value of money over time. This means taxpayers are taxed on a combination of real gains and fictitious income that does not reflect an actual increase in purchasing power (although the tax code provides some accommodations, such as for qualifying sales of owner-occupied homes and properties transferred to heirs). In some cases, this lack of inflation indexing can be significant enough that taxpayers owe taxes on what appears to be a capital gain on paper, but is, in real terms, a net loss.

The federal tax code partially addresses this shortcoming through the preferential treatment of long-term capital gains. Long-term capital gains, defined as net gains on assets held for more than one year, are taxed under a separate rate schedule with lower rates and different brackets. Depending on a taxpayer's overall taxable income, long-term capital gains are taxed at rates of 0 percent, 15 percent, or 20 percent.

At the state level, accommodating the effects of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a "hidden tax," as it leaves taxpayers less well-off due to higher costs and "bracket creep," while increasing the government's spendin is less commonly seen. Thirty states and the District of Columbia overtax capital gains income simply by subjecting capital gains to the same rate schedule that applies to ordinary income.

Three states-Maryland, Minnesota, and Washington< /a>-expose some capital gains to higher rates than those that apply to ordinary income. Specifically, Maryland adds an additional 2 percent capital gains surtax A surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. to the state income tax due on income exceeding $350,000; Minnesota taxes most capital gains at ordinary rates but levies an additional 1 percentage point tax on net investment income exceeding $1 million; and Washington imposes a 7 percent rate on capital gains income up to $1 million and an additional 2.9 percent excise ta xAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on capital gains income over $1 million.

Eight states, like the federal government, apply lower effective individual income tax rates to long-term gains than to ordinary income, either by applying lower statutory rates or by offering an exclusion for a portion of otherwise taxable capital gains, while Missouri exempts capital gains from its income tax. Eight states avoid this dilemma by forgoing an individual income t axAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source altogether.