How Are Capital Gains Taxed in Colorado?
While Colorado taxes capital gains as income, a unique state-specific subtraction allows taxpayers to reduce their tax on certain qualifying assets.
When you sell an asset like stocks, bonds, or real estate for more than you originally paid, the profit is a capital gain. This gain is a form of income subject to taxation at both the federal and state levels. Understanding how these profits are taxed is a component of financial planning, as the tax liability can affect the net return on your investments.
Taxation of Capital Gains in Colorado
Colorado does not have a separate tax system for capital gains; instead, it treats them as regular income. The profit you realize from selling an asset is added to your other income, such as wages and interest, and taxed at the state’s single flat income tax rate. For the 2024 tax year, this rate is 4.25%.
A primary distinction in Colorado’s method is the equal treatment of short-term and long-term gains. At the federal level, gains from assets held for one year or less (short-term) are taxed at higher ordinary income rates, while gains from assets held for more than a year (long-term) are taxed at lower preferential rates. In Colorado, this distinction does not exist for state tax purposes.
The inclusion of capital gains as ordinary income means that a substantial gain from an asset sale can increase your overall state tax liability in direct proportion to the profit earned. Because the rate is flat, every dollar of net capital gain is taxed at the same rate, regardless of the total amount of your income. This uniform application ensures that all taxable income, whether from a paycheck or an investment, is treated consistently under Colorado tax law.
Calculating Your Taxable Gains
Colorado’s income tax calculation begins with your federal taxable income, which is reported on the Colorado Individual Income Tax Return, Form 104. Your federal taxable income from your federal Form 1040 already includes the net total of your capital gains and losses for the year.
This conformity with the federal definition of income streamlines the state tax preparation process. When you transfer your federal taxable income to your Colorado tax return, your net capital gains are automatically carried over and included in the initial income figure.
After establishing the starting income figure from your federal taxable income, the next step involves making specific Colorado additions and subtractions. These are state-specific adjustments that either increase or decrease your taxable income. It is through this modification process that certain tax benefits, including any potential subtractions for specific types of capital gains, are applied to arrive at your final Colorado taxable income.
Colorado Capital Gains Subtraction
Colorado offers a specific tax benefit that allows qualifying taxpayers to subtract certain net capital gains from their state taxable income. This provision, formally known as the Colorado Capital Gains Subtraction, comes with stringent requirements. A primary condition is that the asset sold must have been owned for an uninterrupted period of at least five years prior to the sale.
The subtraction applies to gains from specific types of assets. For tax years prior to 2022, this included real property located in Colorado, tangible personal property, and ownership interests in Colorado-based companies. For tax years 2022 and later, this subtraction has been significantly narrowed and is now generally only available to farmers for gains from the sale of agricultural real property.
To claim this benefit, taxpayers must file Form DR 1316, Colorado Capital Gain Subtraction, with their state tax return. This form requires detailed information about the qualifying capital gain and an affidavit confirming that all requirements have been met. The subtraction is only allowed for gains included in federal taxable income and cannot be claimed if the taxpayer has outstanding state tax liabilities or is in default on obligations to a state or local government. The rules are precise, and only the portion of the gain from an asset meeting the five-year holding period qualifies for the subtraction.