Pennsylvania Capital Gains Tax, Explained

Pennsylvania has run a flat individual income tax rate since 2004, and for the 2026 tax year that rate is still 3.07%, among the lowest flat rates in the country. It applies uniformly across every type of taxable income Pennsylvania recognizes: wages, interest, dividends, business profit, and gains from selling property.

Pennsylvania's own guidance puts it bluntly: the commonwealth makes no provision for capital gains as a separate category, and there's no long-term versus short-term distinction at all. Sell an asset you held ten days or ten years, the math is identical. A $150,000 gain costs $4,605 in Pennsylvania tax, full stop, no brackets, no holding-period test, no separate rate for the recapture slice of a rental sale.

Look at the first row: a long-term gain the IRS taxes at 0% is still Pennsylvania income. Because Pennsylvania's return does not simply piggyback dollar-for-dollar on federal taxable income the way some states' do, and instead calculates gain independently within its own property-disposition class, that 3.07% applies on its own terms even in a year the federal side collects nothing.

Most states either tax capital gains as one more line of ordinary income or don't tax them at all. Pennsylvania does something structurally different, and it's the single most important thing to understand before you sell anything here. Pennsylvania divides all taxable income into eight separate classes: compensation, interest, dividends, net profits from a business or profession, net gains from the sale of property, net income from rents and royalties, income from estates and trusts, and gambling and lottery winnings.

Each class is its own silo. A loss in one class generally cannot offset a gain or income in a different class, in the same tax year or any other. Pennsylvania's own guidance states it plainly: the commonwealth "does not allow an offset of loss against gain from one class of income to another or between two taxpayers," meaning spouses filing jointly can't use one spouse's loss in a class to shelter the other spouse's income in a different class either.

The second half of the rule is just as unusual, and arguably more consequential: Pennsylvania has no provision for carrying a loss forward to a future year or back to a prior one. Federal law lets you carry an unused capital loss forward indefinitely, offsetting future gains for as long as it takes to use it up. Pennsylvania does not. A property loss that isn't fully absorbed by property gains in that same class in that same tax year is gone for state purposes. There's no future-year deduction waiting for you.

Worked example: say you have $60,000 of W-2 wages and, in the same year, a $40,000 loss from selling a losing stock position. Under federal rules, that loss would offset $3,000 of your wage income immediately and carry forward against future capital gains. Under Pennsylvania rules, the wages sit in the compensation class and the stock loss sits in the property-disposition class. They never touch. You pay Pennsylvania's 3.07% on the full $60,000 of wages, and the $40,000 loss can only offset other property-disposition gains realized that same year. If you don't have $40,000 of offsetting property gains in that year, the loss produces zero Pennsylvania tax benefit, ever.

The federal system sorts gains into buckets: short-term gains at your ordinary federal bracket, long-term gains (assets held over a year) at 0%, 15%, or 20%, with the 3.8% net investment income tax layered on above $200,000 single or $250,000 married filing jointly MAGI. Pennsylvania ignores all of that nuance and taxes the whole gain, short or long-term, at the flat 3.07%, calculated independently within its own property-disposition class.

Worked example: a Pennsylvania couple with $180,000 of W-2 income sells stock held three years for a $100,000 long-term gain. That gain sits in the 15% federal bracket, and their MAGI stays under the $250,000 NIIT threshold, so the math is two lines: federal $100,000 x 15% = $15,000, Pennsylvania $100,000 x 3.07% = $3,070. Combined: $18,070, about 18.07% all-in, among the lowest combined state-plus-federal totals in the country for a gain like this. Push the same gain over the NIIT threshold and add another $3,800 (3.8% x $100,000) to the total.

The favorable rate is real, but it only tells half the story. The moment a sale involves a loss rather than a gain, the two systems diverge sharply. Federally, that loss can offset other capital gains, up to $3,000 of ordinary income annually, and anything left over carries forward to future years. In Pennsylvania, the same loss is trapped inside its own income class for that one tax year, with no carryforward at all. A strategy built purely around the low 3.07% rate, without accounting for how losses actually work here, tends to understate the real Pennsylvania tax bill in a mixed gain-and-loss year.

On the federal side, a rental sale splits into layers: the depreciation you claimed comes back as recapture at up to 25%, the remaining gain gets long-term rates, and the NIIT can ride on top. Pennsylvania flattens all of it, recapture and appreciation alike, into its net-gains-from-property class and taxes the whole number at 3.07%, with no separate recapture rate.

Worked example: you sell a Philadelphia-area rental for a $200,000 total gain, of which $60,000 is depreciation recapture, and the remaining $140,000 falls in your 15% federal bracket. Federal: $60,000 x 25% = $15,000, plus $140,000 x 15% = $21,000, $36,000. Pennsylvania: $200,000 x 3.07% = $6,140, no separate recapture rate, no separate schedule. Combined: about $42,140 before any NIIT.

The loss-rule mechanics matter most when a rental sale goes the other way. If a different property, or a different sale, produces a Pennsylvania property loss in that same tax year, it can offset this rental gain since both sit in the same net-gains-from-property class. But if the loss happens in a different year, or the offsetting position is a stock loss realized after the rental gain already closed and doesn't line up in the same tax year, Pennsylvania gives you nothing for it. A 1031 exchange, where it fits, sidesteps the issue entirely by deferring the gain rather than realizing it.

Nearly every Pennsylvania municipality and school district levies its own local Earned Income Tax on top of the state's 3.07%, under a uniform collection system created by Act 32. Rates vary by jurisdiction, and it's a real cost most Pennsylvania workers budget for. It is not, however, a cost that touches a capital gain.

The name is the clue: Earned Income Tax. It applies to wages, salaries, commissions, and net profits from a trade or business, the kinds of income you work for. Investment income, interest, dividends, and capital gains, falls outside its scope entirely. Sell stock, a rental property, or a business interest as a Pennsylvania resident, and you owe the state's 3.07% on the gain, but no local EIT on that same dollar, regardless of which municipality or school district you live in.