North Dakota Capital Gains Tax: A Comprehensive Overview

A capital gain represents the profit realized from the sale of an asset, such as stocks, bonds, or real estate. When you sell an asset for more than its original purchase price, the difference is a capital gain. While the federal government has a distinct set of rules for taxing these profits, individual states also have their own specific approaches. North Dakota has established its own regulations for how residents must account for capital gains on their state income tax returns.

North Dakota’s Approach to Taxing Capital Gains

North Dakota does not impose a separate tax rate for capital gains. Instead, the state’s income tax calculation begins with a taxpayer’s federal adjusted gross income (AGI). Since net capital gains are already factored into the federal AGI, they are automatically included in the income subject to North Dakota’s income tax. This means both short-term and long-term gains are treated as ordinary income for state tax purposes.

Once included in North Dakota income, these gains are taxed according to the state’s progressive income tax brackets. For the 2024 tax year, these rates range from 0% to 2.5%. The tax brackets are graduated, meaning as a taxpayer’s income increases, it is taxed at progressively higher rates.

The tax brackets for the 2024 tax year depend on the filing status. For single filers, a 0% rate applies to taxable income up to $47,150, a 1.95% rate applies to income from $47,151 to $238,200, and a 2.5% rate applies to income over $238,200. For those married filing jointly, the 0% rate applies to taxable income up to $78,775, the 1.95% rate covers income from $78,776 to $297,750, and the 2.5% rate is for income exceeding that threshold.

The North Dakota Capital Gains Deduction

While North Dakota taxes capital gains as ordinary income, it offers a tax benefit to offset this liability. The state provides a deduction specifically for net long-term capital gains. This deduction is available to individuals, estates, and trusts that have realized qualifying gains.

To qualify for this deduction, the gain must meet two primary criteria. First, it must be a net long-term capital gain, meaning it must originate from the sale of an asset held for more than one year. Short-term capital gains are not eligible for this specific deduction. Second, the gain must be derived from assets that have a “North Dakota situs,” which means the asset has a direct connection to the state.

Examples of assets with a North Dakota situs include real property located within the state and tangible personal property that was physically in North Dakota at the time of its sale. The deduction also applies to the sale of an ownership interest in a pass-through entity, like a partnership or S corporation, to the extent that the gain is attributable to the entity’s assets located in North Dakota.

Taxpayers can deduct 40% of their qualifying net long-term capital gain from their North Dakota income. This deduction is calculated on a specific state tax form, Schedule ND-1CR, before being carried over to the main state tax return.

Reporting Capital Gains on Your State Tax Return

The starting point for your state return, Form ND-1, is your federal adjusted gross income (AGI). This figure, which already includes all your net capital gains, is entered directly onto the initial lines of the form, establishing the basis for your state tax calculation.

From there, taxpayers who have qualifying long-term capital gains from North Dakota sources must complete Schedule ND-1CR, titled Computation of ND Tax. This schedule is where the state-specific capital gains deduction is calculated. On this form, you will report the total amount of your net long-term capital gain that is eligible for the deduction. The form guides you through the calculation, applying the 40% deduction rate to the qualifying gain to determine the total deductible amount.

After completing the relevant lines on Schedule ND-1CR and calculating the precise amount of your capital gains deduction, that figure is then transferred back to the main Form ND-1. It is entered on the line designated for state-specific deductions from income. This action directly reduces your North Dakota taxable income, lowering the amount of income that is subject to the state’s tax rates.

This process ensures that while all capital gains are initially included in your state income via the federal AGI, the specific deduction for North Dakota-sourced long-term gains is properly applied. The final taxable income figure on Form ND-1 reflects this adjustment, leading to a lower overall state tax liability.