Capital Gains Tax in Minnesota: Complete Guide 2026
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Capital Gains Tax in Minnesota: Complete Guide 2026
Tax information is for educational purposes only and does not constitute tax advice. Consult a licensed tax professional for your specific situation.
Minnesota has one of the highest capital gains tax rates in the country, with a top marginal rate of ~9.85%. The state taxes all capital gains as ordinary income with no preferential rate for long-term gains. Combined with federal taxes and the Net Investment Income Tax, Minnesota residents can face combined capital gains rates exceeding ~33%. This guide covers Minnesota’s tax treatment of capital gains, how it compares to other states, and strategies for managing the tax burden.
Minnesota Capital Gains Tax Rates
Minnesota uses a graduated income tax system that applies to all income, including capital gains:
| Tax Rate | Single Filer Income | Married Filing Jointly Income |
|---|---|---|
| ~5.35% | $0 - ~$31,690 | $0 - ~$46,330 |
| ~6.8% | ~$31,691 - ~$104,090 | ~$46,331 - ~$183,340 |
| ~7.85% | ~$104,091 - ~$183,340 | ~$183,341 - ~$324,420 |
| ~9.85% | Over ~$183,340 | Over ~$324,420 |
The top ~9.85% rate is the fifth-highest state income tax rate in the nation and applies to all income above the threshold, including capital gains.
Combined Federal and Minnesota Capital Gains Tax
| Scenario | Federal Rate | MN Rate | Combined Rate |
|---|---|---|---|
| Long-term, ~0% federal bracket | ~0% | ~5.35-6.8% | ~5.35-6.8% |
| Long-term, ~15% federal bracket | ~15% | ~7.85-9.85% | ~22.85-24.85% |
| Long-term, ~20% federal bracket | ~20% | ~9.85% | ~29.85% |
| Long-term + NIIT | ~23.8% | ~9.85% | ~33.65% |
| Short-term, top federal bracket | ~37% | ~9.85% | ~46.85% |
A Minnesota resident in the highest brackets faces a combined long-term capital gains rate of approximately ~33.65%, one of the highest in the nation.
How Minnesota Taxes Capital Gains
Federal Conformity
Minnesota starts with federal taxable income (FTI) as its starting point, then applies state-specific additions and subtractions. Since capital gains are included in FTI, they flow directly into Minnesota taxable income at ordinary rates.
No State-Level Preferential Rate
Unlike the federal system, which taxes long-term gains at preferential rates, Minnesota applies its full graduated rate structure to all capital gains. This means:
- Short-term gains (held less than ~1 year): Taxed at both federal ordinary rates and Minnesota ordinary rates
- Long-term gains (held ~1+ year): Federal preferential rate applies, but Minnesota taxes at ordinary rates
Capital Loss Rules
Minnesota follows federal capital loss rules:
- Losses offset gains dollar for dollar
- Up to ~$3,000 of net capital losses deductible against ordinary income
- Unused losses carry forward indefinitely
Small Business Capital Gains Exclusion
Minnesota offers a subtraction for qualifying gains from the sale of certain small business stock. To qualify, the stock must be in a C corporation headquartered in Minnesota with assets under ~$50 million. The exclusion can be up to ~$10 million. This is a significant but narrowly targeted benefit.
Minnesota vs. Neighboring States
| State | Top Capital Gains Rate | System | Combined Top Rate (with Federal) |
|---|---|---|---|
| Minnesota | ~9.85% | Ordinary income | ~33.65% |
| Wisconsin | ~7.65% | Ordinary income | ~31.45% |
| Iowa | ~5.7% | Ordinary income | ~29.5% |
| North Dakota | ~1.95% | Ordinary income | ~25.75% |
| South Dakota | ~0% | No income tax | ~23.8% |
Minnesota’s rate is the highest in the upper Midwest, and the differential with South Dakota (~9.85% vs. ~0%) has driven significant attention to cross-border tax planning and relocation.
For the full comparison, visit our state income tax rates comparison.
Strategies for Reducing Minnesota Capital Gains Tax
Tax-Loss Harvesting
Systematically realizing losses to offset gains is especially valuable in Minnesota, where each dollar of loss offsets gains taxed at up to ~9.85% at the state level. Review your portfolio at least quarterly for harvesting opportunities.
Maximize Tax-Advantaged Accounts
Gains within 401(k), IRA, HSA, and Roth accounts grow free of Minnesota capital gains tax. Maximizing these accounts shields investment growth from the high state rate.
Installment Sales
For large asset sales, installment sale treatment spreads the gain over multiple years. This can keep total income below the ~$183,340 threshold (single) where the top ~9.85% rate begins.
Tips for Managing Minnesota Capital Gains Tax
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Consider the holding period carefully. While Minnesota taxes short-term and long-term gains at the same state rate, the federal rate difference is dramatic. Holding investments for at least ~1 year can reduce your combined rate from ~46.85% to ~33.65%, a savings of ~$13,200 per ~$100,000 of gains. See our federal income tax guide.
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Harvest losses year-round. With state savings of up to ~9.85 cents per dollar of loss, aggressive loss harvesting is valuable. Do not wait until December; review your portfolio regularly and harvest losses as they arise.
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Explore the small business stock subtraction. If you are selling stock in a qualifying Minnesota C corporation, the subtraction can eliminate state tax on gains up to ~$10 million. Verify all qualification requirements with a tax professional.
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Use Roth accounts strategically. Roth IRA and Roth 401(k) withdrawals are tax-free at both federal and state levels. Converting traditional accounts to Roth accounts (paying tax now on the conversion) can eliminate future capital gains exposure in those accounts.
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Time large gains carefully. If you expect your income to be lower in a future year (retirement, sabbatical, career change), deferring a large gain to that year can drop you into a lower Minnesota bracket, potentially saving ~2-4% in state tax. Check our self-employment tax guide for additional planning.
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Evaluate relocation. The ~9.85% differential between Minnesota and South Dakota on capital gains is significant. For a ~$1 million gain, Minnesota tax would be approximately ~$98,500 versus ~$0 in South Dakota. While relocation is a major decision, the tax savings on large gains can be substantial.
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Make adequate estimated payments. Minnesota imposes underpayment penalties for insufficient estimated tax payments. If you realize a significant capital gain during the year, adjust your estimated payments promptly using Form M1, Underpayment of Estimated Tax.
Key Takeaways
- Minnesota taxes all capital gains as ordinary income at rates up to ~9.85%, with no preferential rate for long-term gains.
- Combined federal and Minnesota capital gains tax can exceed ~33.65% for high-income taxpayers.
- Minnesota’s ~9.85% top rate is the highest in the upper Midwest, with South Dakota’s ~0% creating a stark contrast across the border.
- The small business stock subtraction can eliminate state tax on qualifying gains up to ~$10 million.
- Tax-loss harvesting, tax-advantaged accounts, and installment sales are key strategies for managing the high rate.
- Holding investments for at least ~1 year saves approximately ~13% in combined taxes due to federal preferential treatment.
Next Steps
- Federal Income Tax Guide 2026 — Understand federal capital gains rates and how they interact with Minnesota.
- State Income Tax Rates Comparison 2026 — Compare Minnesota’s rates with all other states.
- Tax Bracket Calculator — Model your combined federal and Minnesota capital gains tax.
- Find a CPA Near You — Get expert help with Minnesota capital gains tax planning.