How Is Capital Gains Taxed in New Mexico?
New Mexico taxes capital gains as ordinary income, but a significant state deduction can reduce your overall tax liability on certain qualifying assets.
When you sell an asset like stocks or real estate for more than you paid for it, the profit is a capital gain. The federal government taxes these gains, and many states have their own rules. New Mexico has a distinct approach to taxing these profits, which includes a tax deduction that can lower a taxpayer’s overall liability.
New Mexico’s Taxation of Capital Gains
New Mexico does not have a separate tax rate for capital gains. Instead, profits from asset sales are treated as ordinary income and taxed at the same graduated rates as wages, which range up to 5.9%. The process for state taxation begins with your federal Adjusted Gross Income (AGI). This AGI figure, which includes your net capital gains and losses, is the starting point for your New Mexico tax return.
For federal purposes, capital gains are categorized as short-term (held one year or less) or long-term (held more than one year). Short-term gains are taxed at regular federal income tax rates, while long-term gains are taxed at lower federal rates. While New Mexico does not use these different federal rate structures, the calculation of net capital gain on your federal return directly impacts the income reported to the state.
The New Mexico Capital Gains Deduction
A feature of New Mexico’s tax code is a deduction for net capital gains, and the rules for this deduction are changing.
For tax years through 2024, taxpayers can deduct the greater of $1,000 or 40% of their net capital gain. This deduction applies to the net capital gain amount from the federal return, defined as net long-term capital gains minus any net short-term capital losses.
Beginning with the 2025 tax year, the rules become more restrictive. The deduction will be limited to gains from the sale of a New Mexico business. For taxpayers who qualify, the deduction is the greater of $2,500 or 40% of the gain, but it is capped at a maximum of $1 million in capital gains.
How to Claim the Deduction on Your State Tax Return
To claim the New Mexico capital gains deduction, you must complete and attach Schedule PIT-ADJ, Schedule of Additions and Deductions, to your state income tax return. On this form’s designated line, you will calculate the amount of your deduction based on the rules for the applicable tax year.
After calculating the deduction amount on the PIT-ADJ, you transfer that figure to the main New Mexico Personal Income Tax Form, the PIT-1. There is a specific line on the PIT-1 for “Deductions from Schedule PIT-ADJ.” Entering the amount here will reduce your New Mexico taxable income and lower your state tax liability.