How Is Capital Gains Taxed in Michigan?

When an asset such as stocks, bonds, or real estate is sold for more than its original purchase price, the resulting profit is a capital gain. This gain is income subject to taxation by both the federal government and the state. The federal government has a distinct system for taxing capital gains, which directly influences how they are subsequently taxed at the state level.

Federal Capital Gains Tax Framework

The federal tax system categorizes capital gains into two types based on the holding period. A short-term capital gain results from the sale of an asset held for one year or less. These gains are taxed at the same rates as an individual’s ordinary income, which for 2025 range from 10% to 37%.

A long-term capital gain arises from selling an asset that was held for more than one year. The federal government taxes these gains at preferential rates, which are lower than ordinary income rates. For the 2025 tax year, these rates are 0%, 15%, or 20%, determined by the taxpayer’s taxable income and filing status.

All capital gains and losses are first calculated on IRS Schedule D. The net capital gain is then included in the taxpayer’s Adjusted Gross Income (AGI) on Form 1040. This AGI figure is the starting point for calculating income tax for the federal government and many states. High-income earners may also be subject to an additional 3.8% Net Investment Income Tax (NIIT).

Michigan’s Taxation of Capital Gains

Michigan does not have a separate, preferential tax rate for capital gains. Instead, the state treats all capital gains, regardless of whether they are short-term or long-term, as regular income. This income is subject to Michigan’s single flat income tax rate of 4.05%.

The process begins with the Federal Adjusted Gross Income (AGI), which already includes the net total of all capital gains. This AGI figure is directly transferred from the federal Form 1040 to the Michigan Individual Income Tax Return (Form MI-1040). It becomes the primary component of Michigan’s income tax base.

For example, if a taxpayer has a $10,000 net capital gain included in their federal AGI, that entire $10,000 is also included in the income base for Michigan tax purposes. This amount is then taxed at the state’s flat rate, as the state does not distinguish between short-term and long-term gains.

This method means that while a long-term capital gain might be taxed at a lower rate on a federal return, it will still be taxed at the full 4.05% on the Michigan return. The characterization of the gain is only relevant for federal tax purposes.

Michigan Specific Capital Gains Deductions

While Michigan taxes capital gains as ordinary income, it offers certain deductions that can reduce the amount of taxable income from these gains at the state level. These are subtractions claimed on the Michigan return after the Federal Adjusted Gross Income (AGI) has been established and are specific to Michigan’s tax code.

A notable deduction relates to gains from property that was acquired before October 1, 1967. Taxpayers who sell such property may be able to deduct a portion of the capital gain. The calculation for this deduction allows the taxpayer to re-evaluate the asset’s cost basis to its market value on that 1967 date, potentially reducing the taxable gain.

Other specific deductions may apply in more specialized situations, such as subtractions related to the sale of certain types of business assets or farm property. To claim these, taxpayers must meet specific criteria outlined in Michigan’s tax instructions.

The calculations for these specialized deductions are made on Form MI-1040D, “Adjustments of Capital Gains and Losses.” The resulting adjustment is then carried over to Michigan Schedule 1, the form used for all additions and subtractions to income. This reduces the total income subject to Michigan’s flat tax.

Reporting Capital Gains on Michigan Tax Forms

The process of reporting capital gains on a Michigan tax return is a matter of transferring figures from federal forms and making state-specific adjustments. The starting point is the Federal Adjusted Gross Income (AGI) from Form 1040. This AGI, which includes the net capital gain from Schedule D, must be entered on the Michigan Individual Income Tax Return, Form MI-1040.

After entering the federal AGI, the next step involves accounting for any Michigan-specific adjustments to income on Michigan Schedule 1, “Additions and Subtractions.” If a taxpayer is eligible for a state-level capital gains deduction, it is claimed on this schedule. The total amount of subtractions from Schedule 1 is then entered on the MI-1040.

This subtraction reduces the federal AGI to a lower Michigan-specific income amount. The MI-1040 guides the taxpayer through a few more calculations, including personal exemptions, to arrive at the final “Michigan Taxable Income.” It is this final figure that is multiplied by the state’s flat income tax rate to determine the total Michigan tax liability.