North Dakota Capital Gains Tax, Explained

North Dakota already had some of the lowest individual income tax rates in the country before its 2023 reform, and that reform pushed the rates lower still. The old five-bracket system was replaced with three brackets: 0%, 1.95%, and 2.50%, with the top rate dropping from 2.90% to 2.50%. Every one of those rates applies equally to capital gains, since North Dakota has no separate capital gains schedule; gains simply flow into the same brackets as wages, before the exclusion in Section 2 is applied.

For single filers, the most recently confirmed brackets run: 0% on the first roughly $48,475 of taxable income, 1.95% from there to about $244,825, and 2.50% above that. Married filing jointly runs 0% to about $80,975, 1.95% to about $298,075, and 2.50% above. Confirm the exact inflation-indexed cutoffs for the year you actually sell; North Dakota re-indexes these brackets annually.

This is what actually sets North Dakota apart from most other low-tax states. Under North Dakota Century Code 57-38-30.3(2)(d)(1), your North Dakota taxable income is reduced by 40% of net long-term capital gain (the excess of long-term gain over any short-term capital loss for the year), to the extent that gain is allocated to North Dakota. Only the remaining 60% ever reaches the bracket structure in Section 1. The exclusion has been at 40% since a 2013 legislative change raised it from 30%, and it applies broadly to long-term gain rather than being carved out for a specific asset class.

Stack the exclusion on top of an already-low 2.50% top rate and the combined effect is unusual even among no-separate-schedule states: a top-bracket North Dakota seller pays an effective state rate of about 1.5% on a long-term gain, among the lowest all-in state rates on capital gains in the country for a state that isn't income-tax-free outright.

Worked example: sell an asset held three years for a $150,000 gain, and you're in North Dakota's top bracket. The exclusion removes $60,000 (40%), leaving $90,000 taxable. At 2.50%, that's $2,250 in North Dakota tax, an effective 1.5% on the full $150,000. Sell the same asset at eleven months instead of thirteen and the exclusion disappears entirely: the full $150,000 is taxable at 2.50%, a bill of $3,750, about $1,500 more for missing the one-year line. The gap is smaller in dollar terms than in states with higher brackets, but the exclusion is still real money, and it's stacked on top of whatever the one-year line does to your federal rate.

North Dakota's exclusion only ever touches 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, ordinary rates up to 37% for short-term gains, and the 3.8% net investment income tax layered on above $200,000 MAGI (single) or $250,000 (married filing jointly).

Because North Dakota's own bite is so small, your all-in combined rate on a sale is driven almost entirely by the federal side. A high-income seller at the top of both systems lands near 21.5% combined on a long-term gain (20% federal plus 3.8% NIIT plus about 1.5% North Dakota, rounded), compared with 25% to 33%-plus combined in several higher-tax states for the same federal facts. A short-term gain at the top of both systems can still run close to 43% once ordinary federal rates, the NIIT, and North Dakota's uncushioned 2.50% are stacked, though even that ceiling is meaningfully lower than most other states.

The planning takeaway is the same as everywhere else, just with a smaller state number attached: everything that reduces your federal gain, loss harvesting, gain timing into a lower-income year, or an installment sale that spreads income across years, reduces the North Dakota number in the same motion, since the exclusion applies to whatever net long-term gain shows up allocated to North Dakota.

This is the detail that trips up rental sellers everywhere, and North Dakota is no exception. North Dakota's exclusion statute is written around net long-term capital gain as defined for federal purposes. Depreciation recapture on a rental or commercial building is generally characterized federally as ordinary income, or as a specially taxed category of unrecaptured Section 1250 gain, rather than as garden-variety long-term capital gain, so the recaptured slice generally doesn't get the benefit of North Dakota's 40% exclusion the way the appreciation portion does.

A rental sale splits into two very different pieces for North Dakota purposes. The depreciation you claimed comes back as recapture, taxed federally at up to 25% and by North Dakota at your ordinary bracket rate with no exclusion. The remaining appreciation, the part above your original depreciated basis, is what qualifies for the 40% exclusion.

Worked example: you sell a rental for a $200,000 total gain, of which $60,000 is depreciation recapture and $140,000 is appreciation, and you're in the top federal and North Dakota brackets. Federal: $60,000 x 25% = $15,000, plus $140,000 x 15% (assumed LTCG bracket) = $21,000. North Dakota: the $60,000 recapture is taxed in full at 2.50% = $1,500; the $140,000 appreciation gets the 40% exclusion, so $84,000 is taxable at 2.50% = $2,100. North Dakota total: $3,600. Small in absolute terms compared to most states, but the exclusion still only ever touched the appreciation slice, not the recapture.

North Dakota's economy runs on two pillars, agriculture and Bakken-region oil and gas production, and both generate capital gains scenarios that look different from a typical stock sale. Farmland that's appreciated over a multi-decade hold, mineral rights and royalty interests tied to oil and gas leases, and equipment sold as part of a farm transition all pass through the same 40% long-term exclusion and bracket structure described above; North Dakota doesn't carve out a separate, larger exclusion for farm or mineral assets the way some agricultural states do.

The planning wrinkle is usually on the federal characterization side, not the state side. Selling a mineral interest or royalty stream outright, after a long hold, generally produces capital gain eligible for both the federal long-term rates and North Dakota's exclusion. Lease bonus payments and ongoing royalty income, by contrast, are generally taxed as ordinary income, not capital gain, at both the federal and North Dakota level, so they get neither the federal 0/15/20% treatment nor the state's 40% exclusion.

For farm transitions specifically, the combination of a 40% exclusion and a 2.50% top bracket means North Dakota's own tax hit on a multi-generational land sale is typically modest relative to the federal recapture and long-term gain layers, which is exactly why getting the federal side, basis, depreciation history, and holding structure, right is where the real planning value sits.