What Is the Capital Gains Tax in Indiana?
Understand how Indiana's flat-rate tax system applies to your investment profits and how unique state-specific rules can affect your final tax liability.
A capital gain is the profit from the sale of an asset, such as stocks, bonds, or real estate. For Indiana residents, these gains are taxed first at the federal level and then by the state. This article explains the federal and Indiana state rules for taxing capital gains, available deductions, and how to report this income.
Federal Capital Gains Tax Framework
The foundation for taxing capital gains is federal law, which applies to all Indiana taxpayers. Federal tax regulations categorize capital gains into two types based on the asset’s holding period, which determines how the profit is taxed.
Gains from assets owned for one year or less are classified as short-term capital gains. These gains do not receive any preferential tax treatment. Instead, they are taxed at the same rates as an individual’s ordinary income, which for the 2025 tax year can range from 10% to 37%, depending on total taxable income and filing status.
Profits from assets held for more than one year are long-term capital gains and are subject to lower tax rates of 0%, 15%, or 20%. For the 2025 tax year, a single filer with a taxable income up to $48,350 falls into the 0% bracket. The 15% rate applies to single filers with income from $48,351 to $533,400, and the 20% rate applies to incomes above that threshold. These income brackets are adjusted annually for inflation.
The federally calculated net capital gain is determined after netting all short-term and long-term gains and losses on Schedule D of the federal Form 1040. High-income earners may also be subject to an additional 3.8% Net Investment Income Tax (NIIT), which applies to capital gains and other investment income if their modified adjusted gross income exceeds certain thresholds.
How Indiana Taxes Capital Gains
Indiana’s approach to taxing capital gains is simpler than the federal system. The state does not distinguish between short-term and long-term capital gains. The holding period of an asset has no bearing on the amount of state tax owed.
All net capital gains are treated as ordinary income in Indiana and are subject to the state’s single, flat individual income tax rate. For the 2025 tax year, this rate is 3.00%. This flat tax system provides a predictable calculation for taxpayers.
For example, consider a single taxpayer with a $10,000 long-term capital gain. If their income places them in the 15% federal bracket, they would owe $1,500 in federal tax. In Indiana, that same $10,000 gain is taxed at the 3.00% flat rate, resulting in $300 of state tax liability.
Available Indiana-Specific Capital Gains Deductions
Indiana offers specific deductions that can reduce the amount of capital gains income subject to state tax. These deductions are unique to Indiana and are separate from any claimed at the federal level.
The primary state deduction is the Indiana Capital Gain Deduction, which allows taxpayers to deduct a portion of gains from selling certain assets. To qualify, the gain must originate from the sale of stock in a qualified Indiana-based company or ownership in an Indiana business. The investment must be in a company that maintains its headquarters or a large portion of its operations within the state.
Eligibility for this deduction is specific and requires careful documentation, as it is not automatic and must be affirmatively claimed by the taxpayer. It is designed to encourage investment in local businesses and can provide substantial tax relief. The amount of the deduction can vary, but it directly reduces the income subject to Indiana’s flat tax.
Beyond the primary capital gains deduction, other state-level deductions may also help offset this income. For instance, certain types of income, such as military retirement pay, may be deductible on the Indiana return. Taxpayers must consult the state’s tax forms and instructions to identify all potential deductions.
Reporting Capital Gains on an Indiana Tax Return
Reporting capital gains on an Indiana tax return begins after all federal calculations are complete. The process involves transferring figures from federal forms to Indiana’s state-specific documents.
The starting point for the Indiana tax return, Form IT-40, is the federal adjusted gross income (AGI) from Form 1040. This AGI figure already includes the net capital gain calculated on the federal Schedule D. The AGI is entered on the first line of the IT-40, automatically including the capital gain in the income being taxed by the state.
After entering the federal AGI, the next step is to claim any applicable Indiana-specific deductions. To claim the Indiana Capital Gain Deduction, taxpayers must use Schedule 2: Deductions. The total from this schedule adjusts the income reported on the IT-40.
Taxpayers must attach supporting documentation when claiming these deductions. For the Capital Gain Deduction, this may include statements detailing the transaction and proof the investment meets state criteria. Failure to provide this information can result in the denial of the deduction and a potential underpayment of tax. The final taxable income on the IT-40 is then multiplied by the state’s flat tax rate to determine the Indiana tax liability.