Minnesota Capital Gains Tax: Rules and Rates

When you sell an asset like stocks, bonds, or real estate for more than you paid, the profit is a capital gain. The tax treatment depends on how long you held the asset. A gain from an asset held for one year or less is short-term, while a gain on an asset held for more than a year is long-term.

While the federal government taxes these gains differently, Minnesota has its own system. Understanding this framework is important for Minnesota taxpayers to meet their state tax obligations.

Minnesota’s Approach to Taxing Capital Gains

Minnesota does not offer a separate, lower tax rate for long-term gains. The state treats all net capital gains, both short-term and long-term, as ordinary income. This means the profit is added to your other earnings, like wages, and taxed at the state’s standard income tax rates. This approach differs from the federal system, which has preferential rates for long-term gains.

The integration of capital gains into regular income can push a taxpayer into a higher tax bracket. Minnesota has a progressive tax structure with four brackets for the 2025 tax year, with thresholds depending on your filing status. For a single filer in 2025:

• 5.35% on the first $32,850 of taxable income.
• 6.80% on income between $32,850 and $107,970.
• 7.85% on income between $107,970 and $200,440.
• 9.85% on income above $200,440.

Minnesota also imposes an additional 1% tax on net investment income exceeding $1 million. This includes income from capital gains, dividends, and interest, creating a potential top rate of 10.85% for high earners.

Calculating Your Minnesota Capital Gains Tax

Calculating your Minnesota capital gains tax begins with your federal tax return. The state uses your federal Adjusted Gross Income (AGI) as the starting point for Minnesota taxable income. Your federal AGI already includes the net capital gain or loss calculated on federal forms, such as IRS Schedule D.

You transfer your federal AGI to your Minnesota income tax return, Form M1. The net capital gain is not taxed separately; it is part of the total income pool subject to Minnesota’s tax rates. Minnesota conforms to the federal definitions of what constitutes a capital asset and how basis is determined.

For example, a single filer with an $80,000 salary and a $20,000 long-term capital gain has a federal AGI of $100,000. On their Minnesota return, the first $32,850 would be taxed at 5.35%, and the remaining $67,150 would be taxed at 6.80%. After determining the initial tax, you would apply any relevant Minnesota-specific tax credits.

State-Specific Capital Gains Adjustments

Minnesota offers a tax benefit for gains from the sale of certain farm property. The state provides a subtraction for the gain on the sale of farm property for an insolvent farmer, which reduces their Minnesota taxable income.

To qualify, the farmer’s debts must be greater than the fair market value of their assets immediately before the sale, and other specific criteria must be met. Taxpayers who have a qualifying gain must complete and file Schedule M1MB, “Business Income Additions and Subtractions,” with their Form M1. This adjustment must be actively claimed by the taxpayer.

Reporting the Sale of Your Home in Minnesota

The sale of a primary residence may not result in a state tax liability because Minnesota conforms to federal exclusion rules. A single filer can exclude up to $250,000 of gain from the sale of a main home, and a married couple filing jointly can exclude up to $500,000. To qualify, you must have owned and used the property as your main home for at least two of the five years preceding the sale.

If your gain is within these limits, it does not enter your federal AGI and requires no action on your Minnesota return. A reporting requirement arises when the gain exceeds the federal exclusion amount. In this situation, the taxable portion of the gain becomes part of your federal AGI, which then flows to your Minnesota return to be taxed as ordinary income.