Minnesota Capital Gains Tax: Rules and Rates

When you sell an asset for more than you paid, the resulting profit is known as a capital gain. This gain is a form of income that is subject to taxation at both the federal and state levels. In Minnesota, the rules governing the taxation of these gains are distinct from federal regulations. Understanding these specific state-level rules is an important part of managing tax obligations for residents who sell assets like stocks, bonds, or real estate.

Determining Your Capital Gain or Loss

A capital asset is any property you own for personal use or as an investment, including items like stocks, bonds, mutual funds, and real estate. When you sell one of these assets, the first step is to calculate your gain or loss. This calculation begins with determining the asset’s basis, which is its original cost. The basis can be adjusted over time to reflect additional investments or certain deductions, creating an adjusted basis.

For example, if you purchase a rental property, your initial basis is the purchase price. If you then spend money on significant improvements, such as a new roof, the cost of that improvement is added to your basis. Conversely, if you claim depreciation deductions for the rental property on your tax returns, those amounts are subtracted from your basis.

The difference between the sale price and the adjusted basis determines the capital gain or loss. If you sell the asset for more than its adjusted basis, you have a capital gain. If you sell it for less, you have a capital loss. Federal tax law distinguishes between short-term and long-term gains based on how long you held the asset.

An asset held for one year or less results in a short-term capital gain or loss. An asset held for more than one year generates a long-term capital gain or loss. This distinction is meaningful for federal taxes, but Minnesota treats these gains differently for state tax purposes.

Federal and Minnesota Tax Treatment of Capital Gains

The federal government and the state of Minnesota have different approaches to taxing capital gains. At the federal level, the holding period of an asset is a major factor. Short-term capital gains are taxed at ordinary income tax rates, which in 2025 range from 10% to 37%. Long-term capital gains, however, receive preferential treatment and are taxed at lower rates of 0%, 15%, or 20%.

Minnesota, in contrast, does not offer a separate, lower tax rate for long-term capital gains. The state treats all net capital gains, regardless of whether they are short-term or long-term, as regular income. This means the profit from selling an asset is added to your other sources of income, such as wages and salaries, and taxed according to Minnesota’s standard income tax brackets.

The state’s income tax system is progressive. For the 2025 tax year, Minnesota has four tax brackets with the following rates:

• 5.35%
• 6.8%
• 7.85%
• 9.85%

This approach means a large capital gain can push a taxpayer into a higher Minnesota tax bracket. For instance, if a single filer with $80,000 in regular taxable income realizes a $20,000 capital gain, that gain is added to their income, pushing their total taxable income to $100,000. Minnesota also imposes an additional 1% tax on net investment income over $1 million, which can bring the top marginal rate on very high capital gains to 10.85%.

Minnesota-Specific Capital Gains Adjustments

While Minnesota taxes capital gains as ordinary income, it offers specific adjustments that can reduce the taxable amount in limited circumstances.

A subtraction is available for capital gains from the sale of farm property, but only if the farmer is insolvent at the time of the sale. For small business stock, Minnesota conforms to the federal exclusion for Qualified Small Business Stock (QSBS). If a gain from the sale of QSBS is excluded from federal income, it is also subtracted from Minnesota income.

Minnesota’s tax code also conforms to the federal rule that allows taxpayers to exclude a portion of the capital gain from the sale of their primary residence. An individual can exclude up to $250,000 of gain, and a married couple filing jointly can exclude up to $500,000, provided they lived in the home for at least two of the five years preceding the sale.

Reporting and Paying Minnesota Capital Gains Tax

The process of reporting capital gains for Minnesota tax purposes begins with your federal return. The net capital gain calculated on federal Form 1040, Schedule D, is included in your Federal Adjusted Gross Income (AGI). This AGI figure is the starting point for your Minnesota income tax return, Form M1. The capital gain is therefore automatically carried over to your state return as part of your total income.

If you qualify for one of Minnesota’s specific capital gains adjustments, you must file Schedule M1NC, Federal Adjustments. This schedule is used to report various additions and subtractions to your federal AGI to arrive at your Minnesota taxable income. The amount claimed on Schedule M1NC for the capital gain exclusion flows to the main Form M1, reducing the total income subject to Minnesota tax.

Realizing a large capital gain can significantly increase your tax liability. To avoid an underpayment penalty, you may be required to make estimated tax payments to the Minnesota Department of Revenue if you expect to owe $500 or more in Minnesota tax from the gain.

These estimated payments are made in four quarterly installments. The due dates are April 15, June 15, September 15, and January 15 of the following year. Failing to make these required payments on time can result in interest and penalties being assessed on the underpaid amount when you file your annual return.