Virginia Long-Term Capital Gains Tax: What You Need to Know

Virginia taxes long-term capital gains differently than ordinary income, affecting how much you owe when selling investments or other assets. Understanding these tax rules helps minimize liabilities and ensures compliance with state regulations.

While federal tax laws provide a baseline, Virginia has its own approach, including specific deductions or exemptions.

Qualification for Long-Term Classification

To qualify as long-term, an asset must be held for more than one year before being sold. This aligns with federal guidelines, where the holding period starts the day after acquisition and ends on the sale date. Selling exactly one year after purchase results in short-term classification and higher tax rates.

The type of asset also matters. Stocks, bonds, real estate, and business interests commonly qualify, but special rules apply to collectibles. Inherited assets automatically receive long-term status, regardless of how long the beneficiary holds them.

Certain transactions complicate classification. Selling a stock at a loss and repurchasing it within 30 days triggers the IRS wash-sale rule, disallowing the loss for federal purposes, though Virginia may still recognize the original holding period. Stock splits and dividend reinvestments can also reset the holding period, affecting tax treatment.

Potential State Subtractions

Virginia allows certain subtractions to reduce taxable capital gains. One applies to gains from investments in qualified businesses. Under Virginia Code 58.1-322.02(24), individuals may subtract income from selling stock in a qualified technology business if held for at least five years. This encourages long-term investment in the state’s tech sector and offers tax savings.

Another subtraction applies to specific Virginia-issued obligations. Interest and capital gains from state or local government bonds may be excluded from taxable income, making them attractive for tax-conscious investors. However, this does not extend to federally taxable bonds from other states.

Real estate investors may benefit from land preservation sales. Gains from selling or donating property for conservation purposes may qualify for Virginia’s Land Preservation Tax Credit, reducing tax liability while supporting environmental initiatives.

Federal vs. State Considerations

Virginia taxes long-term capital gains as ordinary income at a flat 5.75% rate, unlike the federal system, which uses a tiered structure of 0%, 15%, or 20% based on income. Even if a taxpayer qualifies for a lower federal rate, they may still owe Virginia’s full income tax on gains.

Depreciation recapture also differs. Federally, Section 1250 recapture taxes depreciation taken on real property at a maximum of 25%. Virginia does not have a separate recapture rule, taxing all gain—including depreciation recapture—at the standard state rate, increasing the tax burden on depreciated property sales.

Virginia follows parts of the federal Qualified Opportunity Fund (QOF) program, allowing investors to defer and reduce capital gains taxes by reinvesting in opportunity zones. However, Virginia does not provide additional state-level incentives, meaning deferred federal capital gains may still be taxed at the state level unless specific exclusions apply.

Filing Steps

Reporting long-term capital gains on a Virginia tax return requires accurate classification and adjustments. Taxpayers must first calculate total capital gains, separating long-term from short-term.

Long-term gains are reported on Virginia Form 760, using the federally adjusted gross income (AGI) from Form 1040 as a starting point. Any state-specific subtractions or additions are included on Schedule ADJ. If eligible for a subtraction, such as gains from qualified technology businesses or exempt municipal bonds, taxpayers must provide supporting documentation.

Estimated tax payments should be reported on Schedule OSC if credits for taxes paid to other states apply. Large windfalls may require estimated payments to avoid Virginia’s underpayment penalty, which applies if tax liability exceeds $150.

Documentation Requirements

Maintaining records is essential for accurate reporting. Taxpayers should keep detailed records of asset purchases, sales, and adjustments affecting gain calculations.

Key documents include purchase and sale confirmations, brokerage statements, and real estate closing documents. These must clearly show acquisition and sale dates, purchase price, and selling price. For assets with improvements or adjustments, such as rental properties, receipts and depreciation schedules help ensure accurate cost basis calculations. If claiming a subtraction, documentation must confirm compliance with Virginia’s eligibility rules.

Electronic recordkeeping simplifies tax reporting, especially for frequent investors. Many brokerage firms provide downloadable tax documents, including Form 1099-B, summarizing capital gains and losses. Taxpayers should verify these figures, as brokerage-reported cost basis may not always reflect adjustments like wash sales or inherited asset step-ups. Retaining records for at least three years after filing is advisable, though longer retention may be necessary for complex transactions.

Noncompliance Repercussions

Failing to report long-term capital gains correctly can result in penalties, interest charges, and legal consequences. The Virginia Department of Taxation reviews returns for discrepancies, and underreporting gains—whether intentional or due to errors—can lead to additional tax assessments. Interest accrues from the original due date, increasing the financial burden.

Penalties depend on the violation. A late payment penalty of 6% per month, up to 30%, applies if tax is unpaid by the due date. Failure to file increases the penalty to 30% of unpaid tax. Substantial underreporting, where discrepancies exceed 25% of total tax liability, may trigger additional penalties. Fraudulent misreporting can lead to criminal charges in severe cases.

Virginia shares tax information with the IRS, meaning discrepancies between federal and state filings can prompt audits. If the IRS adjusts a taxpayer’s federal return due to unreported capital gains, Virginia requires an amended state return within one year. Failure to comply may result in further penalties. Ensuring accurate reporting, retaining documentation, and consulting a tax professional for complex situations can help avoid these issues.