Arkansas Capital Gains Tax, Explained

Under Arkansas Code Section 26-51-815, half of your net capital gain never shows up on your Arkansas return at all. The state has exempted 50% of net capital gain from income tax since July 1, 2016, and it defines "net capital gain" the same way the IRS does: net long-term gain in excess of any net short-term loss. Only the remaining 50% is added to your Arkansas taxable income and taxed at your ordinary bracket.

Worked example: sell an asset for a $200,000 net capital gain, and you're in the top Arkansas bracket. The exclusion removes $100,000 (50%), leaving $100,000 taxable. At 3.7%, that's $3,700 in Arkansas tax, an effective rate of just 1.85% on the full $200,000. Compare that to a state with no exclusion at a similar rate, and Arkansas cuts the state-level bill roughly in half before any other planning even enters the picture.

This is the provision that sets Arkansas apart from every other state on this list. Under Section 26-51-815(b)(3), the portion of a net capital gain that exceeds $10,000,000 in a single tax year is exempt from Arkansas income tax entirely, on top of the standard 50% exclusion that already applies below that threshold. It isn't a bigger discount on the whole gain; it's a second, additional tier that only kicks in once a single year's net capital gain clears eight figures.

In practice, a large gain splits into two very different tax treatments. The first $10 million is taxed the normal way: 50% excluded, 50% taxable at your ordinary Arkansas rate. Everything above $10 million skips the state entirely, taxed at 0% by Arkansas, no exclusion needed because the whole excess amount is exempt.

Worked example: a business owner sells their company for an $18,000,000 net capital gain. The first $10,000,000 gets the standard treatment: 50% excluded, leaving $5,000,000 taxable. The remaining $8,000,000, the excess over the $10 million threshold, is fully exempt, contributing $0 to Arkansas taxable income. Total Arkansas-taxable amount: $5,000,000. At the 3.7% top rate, that's $185,000 in Arkansas tax on an $18 million sale, an effective rate of roughly 1.03% on the full gain. If Arkansas only applied the general 50% exclusion with no $10 million tier, the same sale would generate $9,000,000 of taxable gain and a $333,000 state tax bill, a difference of $148,000 purely from the excess-gain exemption.

This provision is a genuine outlier nationally. Most states either tax capital gains as ordinary income with no ceiling relief or cap benefits at a flat percentage regardless of size. Arkansas does the opposite: the bigger the gain, the more favorable the effective rate gets once it clears $10 million, which makes the state worth a serious look for anyone modeling a large business sale, a concentrated stock liquidity event, or a major real estate portfolio disposition.

The taxable half of your net capital gain, along with the full amount of any gain that doesn't qualify for the exclusion, runs through Arkansas's regular graduated brackets, topping out at 3.7% for the 2026 tax year. That's the product of an aggressive, repeated series of cuts: Arkansas's top rate was 4.9% as recently as 2022, dropped to 4.4% in 2024, then to 3.9% for 2025, and most recently to 3.7% after Governor Sarah Huckabee Sanders called a special legislative session in early May 2026. The bill was signed May 6, 2026, and applies retroactively to January 1, 2026.

This is the fourth rate cut Arkansas has passed since 2023, and the pattern suggests the legislature isn't done. If you're modeling a sale more than a year out, it's worth checking the rate actually in effect for the year you expect to close rather than assuming 3.7% holds, since Arkansas has revisited this number nearly every year recently.

Arkansas's exclusions only ever touch the state return. The federal government still taxes your gain under its own rules: 0%, 15%, or 20% for long-term gains depending on your bracket, and the 3.8% net investment income tax (NIIT) layered on above $200,000 MAGI (single) or $250,000 (married filing jointly).

Put both layers together on the $18,000,000 sale from the example above: federally, at the top 20% long-term rate plus the 3.8% NIIT, that gain owes roughly $4,284,000 (23.8% combined federal rate). Arkansas's share, after the 50% exclusion on the first $10 million and the full exemption above it, comes to about $185,000. Combined, the seller pays close to $4,469,000, an all-in effective rate near 24.8%, with the federal government collecting the overwhelming majority of that bill. For a large Arkansas sale, the state tax line is often almost a rounding error next to the federal one, which makes federal-side planning, timing, installment sales, qualified opportunity funds, charitable structures, the higher-leverage conversation.

A rental or investment property sale in Arkansas splits into two pieces for state tax purposes, and only one of them benefits from the exclusions above. Depreciation you claimed while renting the property out comes back as recapture, treated as ordinary income rather than the net capital gain that Section 26-51-815 exempts. Recapture is taxed federally at up to 25% and by Arkansas at your full ordinary rate, up to 3.7%, with no 50% discount and no benefit from the $10 million tier.

The appreciation above your original depreciated basis, the part that's genuine capital gain, is what qualifies for the 50% exclusion (and the $10 million tier, if the gain is large enough). Sizing that split before you list a property, how much of the total gain is recapture versus appreciation, changes both the federal and Arkansas numbers, and it's worth doing before a sale closes rather than at filing time.

Worked example: you sell a rental for a $300,000 total gain, of which $80,000 is depreciation recapture and $220,000 is appreciation. Arkansas taxes the $80,000 recapture in full at 3.7%, for $2,960. The $220,000 appreciation gets the 50% exclusion, so $110,000 is taxable at 3.7%, for $4,070. Arkansas total: $7,030. The exclusion only ever applied to the appreciation slice.