How Much Is Capital Gains Tax in Tennessee?

Understanding capital gains taxation is important for Tennessee residents. This article clarifies the state’s capital gains tax situation and outlines federal tax obligations. By examining both, individuals can better understand their potential tax liabilities when assets are sold for a profit.

Tennessee’s State Capital Gains Tax

Tennessee does not impose a general state capital gains tax on individuals. This means that if you sell an asset for a profit, the state of Tennessee itself will not levy a tax on that gain. The absence of a broad capital gains tax is a notable aspect of Tennessee’s tax structure, which generally favors low taxation on individual income.

Historically, Tennessee did have a tax on certain investment income, known as the Hall Income Tax. This tax primarily targeted income from interest and dividends.

The Hall Income Tax was fully eliminated as of January 1, 2021. This legislative action solidified Tennessee’s position as a state without an individual income tax, including any state-level tax on capital gains. Consequently, individuals realizing capital gains in Tennessee today do not face a state tax obligation on those profits.

Types of Gains Not Taxed by Tennessee

Given the repeal of the Hall Income Tax and the absence of a general state capital gains tax, various common types of capital gains are not subject to state taxation in Tennessee. This provides a clear advantage for investors and asset holders within the state.

Profits from the sale of real estate, such as a primary residence, vacation homes, or land, are exempt from state capital gains tax in Tennessee. Similarly, gains realized from selling financial instruments like stocks, bonds, and mutual funds are not taxed at the state level. Even gains from the sale of other personal property, including collectibles, art, or valuable possessions, do not incur a state capital gains tax in Tennessee.

Federal Capital Gains Tax

While Tennessee does not levy a state capital gains tax, it is important to understand that capital gains are still subject to federal income tax. This federal obligation applies to all U.S. taxpayers, regardless of their state of residence. The federal taxation of capital gains is a distinct and separate matter from any state-level taxes.

Federal capital gains tax rates depend on two primary factors: the length of time the asset was held and the taxpayer’s overall income level. Gains from assets held for one year or less are classified as short-term capital gains and are taxed at ordinary income tax rates, which can range from 10% to 37%.

Conversely, gains from assets held for more than one year are considered long-term capital gains and typically benefit from lower, preferential tax rates, often 0%, 15%, or 20%, depending on income.