How to Avoid Capital Gains Tax in Missouri

Capital gains tax applies to the profit from selling an asset that has increased in value, such as stocks, real estate, and other investments. Understanding how capital gains are taxed and exploring legal strategies to minimize or avoid this tax is a financial consideration. While capital gains taxation can be complex, certain approaches can help manage potential tax liabilities.

Understanding Capital Gains Tax in Missouri

Capital gains represent the profit you make when you sell a capital asset for more than its original purchase price. Assets generating capital gains can include stocks, bonds, real estate, and even certain collectibles. These gains are categorized based on how long you owned the asset before selling it. Short-term capital gains apply to assets held for one year or less, while long-term capital gains are from assets held for more than one year.

At the federal level, short-term capital gains are typically taxed at your ordinary income tax rates, which can range from 10% to 37%, depending on your income bracket. Long-term capital gains generally receive more favorable tax treatment, with rates typically set at 0%, 15%, or 20% for most individuals. Missouri’s state income tax system historically started its calculation with federal adjusted gross income (AGI), which includes federal capital gains. This meant that capital gains recognized at the federal level would also be subject to Missouri state income tax.

However, a significant change in Missouri law, effective January 1, 2025, has altered this landscape for individuals. This legislation allows individuals to deduct 100% of any capital gains reported on their federal tax return from their Missouri taxable income. This change effectively eliminates state-level capital gains tax for individuals in Missouri. It applies to both short-term and long-term capital gains, regardless of the asset’s holding period, and covers assets like real estate, stocks, bonds, cryptocurrency, and business ownership interests.

Strategies to Reduce Capital Gains Tax

Even with Missouri’s recent change, federal capital gains taxes still apply, making strategies to reduce these taxes relevant.

One common method involves the sale of a primary residence. Federal law allows homeowners to exclude a significant portion of capital gains from taxation when selling their main home. Single filers may exclude up to $250,000 in gain, and married couples filing jointly can exclude up to $500,000. To qualify for this exclusion, you must have owned and used the home as your primary residence for at least two of the five years immediately preceding the sale, and this exclusion can generally be claimed only once every two years.

Harvesting capital losses is another strategy. If you sell investments at a loss, these capital losses can offset any capital gains. If total capital losses exceed capital gains, you can deduct up to $3,000 of the remaining loss against ordinary income each year ($1,500 if married filing separately). Any losses exceeding this annual limit can be carried forward indefinitely to offset gains or a limited amount of ordinary income in future tax years.

Holding assets for more than one year is a fundamental approach to tax efficiency. Assets held for over a year qualify for federal long-term capital gains tax rates, which are typically lower than ordinary income tax rates. While Missouri has eliminated its state capital gains tax for individuals as of 2025, this distinction remains important for managing your federal tax liability. By holding assets for the long term, investors can benefit from these preferential federal rates.

Utilizing tax-advantaged accounts can also provide significant benefits for capital gains. Accounts like 401(k)s, Traditional IRAs, and Health Savings Accounts (HSAs) allow investments to grow on a tax-deferred basis, meaning you do not pay taxes on capital gains until you withdraw the funds, typically in retirement. Roth IRAs offer an even greater advantage, as qualified withdrawals, including investment earnings, are entirely tax-free. HSAs offer a unique “triple tax advantage” where contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

Gifting appreciated assets can be a beneficial strategy for both individuals and charitable giving. When you gift appreciated assets to an individual, such as a family member, the capital gains tax liability shifts from you to the recipient. The recipient generally inherits your original cost basis, and if they later sell the asset, they will be responsible for the capital gains tax. For charitable giving, donating appreciated stock or other long-term appreciated property directly to a qualified charity can allow you to avoid capital gains tax on the appreciation entirely. Additionally, you may be able to claim a charitable deduction for the fair market value of the donated asset, subject to certain adjusted gross income limitations.

Real estate investors may utilize a 1031 exchange, also known as a like-kind exchange, to defer capital gains taxes. This strategy allows you to postpone paying tax on the gain from the sale of an investment property if you reinvest the proceeds into another “like-kind” investment property. To qualify, both the relinquished property and the replacement property must be held for business or investment purposes. Strict timelines apply; you must identify potential replacement properties within 45 days of selling the original property and complete the exchange within 180 days.