Missouri Capital Gains Tax, Explained

On July 10, 2025, Governor Mike Kehoe signed House Bill 594, making Missouri the first state in the country to fully exempt individual capital gains from state income tax. The mechanism is a subtraction, not a rate cut: for any tax year beginning on or after January 1, 2025, an individual filer subtracts 100% of the capital gain reported on their federal return when computing Missouri taxable income. There's no separate Missouri calculation, no holding-period test, and no asset-type restriction written into the exemption itself. If the IRS calls it a capital gain, Missouri lets you subtract it.

Mechanically, you claim it on Form MO-A, attached to your Form MO-1040. The subtraction pulls straight from the capital gain figure on your federal Form 1040. One quirk worth knowing if you file jointly: if one spouse has a gain and the other has a loss for the year, only the spouse with the net gain reports a subtraction amount, since a loss doesn't generate one.

Put a number on it. Before this law, a Missouri resident selling stock, a rental, or a business interest for a $400,000 gain would have had that gain taxed as ordinary income, landing mostly in the state's 4.7% top bracket, for roughly $18,800 in Missouri tax. Sell that same asset in 2025 or later, and the Missouri piece is $0. The federal side is unchanged either way: 0/15/20% depending on your bracket, plus the 3.8% NIIT if you clear the income thresholds, and 25% on any unrecaptured Section 1250 depreciation recapture from real estate. Missouri simply stopped taking a second bite.

The capital gains subtraction doesn't touch how Missouri taxes everything else. Wages, business income, retirement distributions, and any income that isn't a federally reported capital gain still climb Missouri's regular bracket ladder, topping out at 4.7% on taxable income above $9,191 for 2025. Missouri also allows a standard deduction that mirrors the federal amount: $15,750 single, $31,500 married filing jointly for 2025.

The practical effect: Missouri residents now have a real incentive to convert ordinary income into capital gain where the underlying transaction genuinely supports it, since one lane is taxed up to 4.7% and the other is taxed at 0% by the state. That's not a new federal planning idea, entity structure, installment sale terms, and timing of a sale all still matter for the same reasons they always did, but the payoff for getting the characterization right just got larger in Missouri specifically.

It's worth saying plainly, because the headline ("Missouri eliminates capital gains tax") invites the wrong assumption: nothing about HB 594 changes federal tax law. A Missouri resident selling appreciated stock, a business, or a rental property still runs the gain through the federal 0/15/20% long-term brackets (or ordinary rates for anything held a year or less), and still faces the 3.8% Net Investment Income Tax once modified AGI clears $200,000 single or $250,000 married filing jointly. Missouri's new law removes one layer, not the whole stack.

None of the standard federal playbook changes: 1031 exchanges still defer gain, installment sales still spread it, and loss harvesting still offsets it, dollar for dollar, on the federal return. Missouri's subtraction just means every one of those federal wins now also comes with a full state-side win attached, automatically, with no separate Missouri election to file.

This is the question every real estate investor asks first, and Missouri hasn't published a detailed answer yet, so here's the reasoning. When you sell a depreciated rental, the portion of your gain attributable to depreciation you already claimed comes back as unrecaptured Section 1250 gain. Federally, that amount isn't taxed as ordinary income the way equipment recapture under Section 1245 is; it's computed on the Schedule D worksheet and reported as part of your capital gain, just capped at a 25% federal rate instead of the usual 0/15/20%. Because Missouri's subtraction applies to "capital gains reported for federal income tax purposes" with no stated carve-out, the recapture piece appears to qualify for the same 100% Missouri subtraction as the rest of the gain.

If the recapture does qualify, the effect on a Missouri rental sale is substantial: the entire gain, appreciation and depreciation recapture together, escapes state tax, leaving only the federal layers (up to 25% on recapture, 0/15/20% on the rest, plus NIIT) in play. That changes the math on 1031 exchanges too: deferring a gain used to defer both a federal and a state bill, and for a Missouri property sold after 2025 it now mostly defers federal tax alone, since the state bill is already zero without deferring anything.

The exemption belongs to individuals right now, not C corporations. HB 594 gives corporations the same 100% subtraction eventually, but only starting the tax year after Missouri's top individual rate falls to 4.5% or lower, and that rate is 4.7% for 2025. Nobody can say today exactly which year the trigger will hit, since it depends on future state revenue performance under the existing rate-reduction schedule.

Practically, that means a gain realized inside a C corporation, rather than passed through to you individually, still owes Missouri's ordinary rate on the way out, on top of whatever federal corporate tax applies. Most Taxstra clients selling real estate or a closely held business are already using S-corps, LLCs, or direct ownership, structures where the gain flows through to the individual return and gets the full benefit of the new subtraction, but if a C corporation is anywhere in your ownership structure, this gap is worth modeling before a sale, not after.

And the cash-flow mechanics don't disappear just because the state tax does: a large gain still means federal estimated tax payments are due in the quarter of the sale, even though Missouri's own estimated-payment exposure on that same gain has dropped to zero.