Does Ohio Tax Capital Gains? What You Need to Know

Ohio taxes capital gains by including them in a taxpayer’s income, which is then subject to the state’s income tax rates. This approach differs from the federal method, which often uses separate, preferential rates for long-term gains. For Ohio taxpayers, the profit realized from selling an asset is treated as regular income. This means the gain can increase a person’s total taxable income for the year.

The state’s tax system for these gains is integrated directly into its overall income tax structure.

How Ohio Taxes Capital Gains

Ohio does not have a separate tax rate for capital gains. Instead, both short-term and long-term capital gains, as calculated for federal tax purposes, are combined into a taxpayer’s Ohio Adjusted Gross Income (OAGI). This means that the profits from selling assets like stocks, bonds, or real estate are taxed at the same rates as wages and other ordinary income.

Capital gains are subject to Ohio’s progressive income tax brackets. For the 2024 tax year, there is no tax on the first $26,050 of income. Income in the bracket from $26,051 to $100,000 is taxed at 2.75%, and any income over $100,000 is taxed at a rate of 3.5%. A large capital gain has the potential to push a taxpayer into a higher tax bracket.

This treatment differs from the federal system, where long-term capital gains are often taxed at lower rates of 0%, 15%, or 20%, depending on the taxpayer’s overall income. In Ohio, the holding period of an asset does not change the state tax rate applied to the gain, as all capital gains become part of the OAGI.

Ohio’s Business Income Deduction

While Ohio does not offer a deduction specifically for capital gains, some gains may qualify under the state’s Business Income Deduction. This tax benefit allows taxpayers to deduct income from business activities, which can include capital gains from the sale of an ownership interest in a business. Business income is defined as income from a sole proprietorship or a pass-through entity, such as a partnership, S corporation, or LLC. For a capital gain to qualify for the deduction, the seller must have materially participated in the business’s operations.

For the 2024 tax year, this deduction allows single and married joint filers to deduct the first $250,000 of business income. Those who are married and file separately can deduct the first $125,000.

Reporting Capital Gains on an Ohio Tax Return

The process of reporting capital gains on an Ohio tax return begins with the taxpayer’s Federal Adjusted Gross Income (FAGI). This figure, calculated on the federal Form 1040, serves as the starting point for the Ohio individual income tax return, Form IT 1040. Since federal law determines what constitutes a capital gain, this initial number already includes all taxable gains.

From the FAGI, taxpayers must make certain adjustments on Ohio Schedule A to arrive at their Ohio Adjusted Gross Income. This schedule is where taxpayers can claim deductions that are specific to Ohio law, including the Business Income Deduction. To claim the Business Income Deduction, the taxpayer must report the qualifying amount on the designated line of Schedule A, which reduces the OAGI carried over to the main IT 1040 form.