Vermont Capital Gains Tax, Explained

Unlike states that carve out a discounted rate for long-term gains, Vermont simply adds your capital gain to the rest of your income and runs it through the state's regular graduated brackets. For 2026, single filers pay 3.35% up to $45,400, 6.60% up to $110,050, 7.60% up to $229,550, and 8.75% above that. Married filing jointly thresholds run roughly double. There's no distinction between short-term and long-term gains in the rate itself, the holding period only matters for whether you qualify for the exclusion described below.

Because a large capital gain stacks on top of your other income, a sizable sale can push the whole household into the top 8.75% bracket for the year, even if your normal wage income sits comfortably in a lower one. That's exactly the scenario the exclusion below is built to soften.

This is Vermont's signature move on capital gains, and it's more nuanced than a single flat discount. You get to choose between two exclusions, but not both in the same year. Option one: a flat $5,000 exclusion of your adjusted net capital gain, available no matter how long you held the asset. Option two: a 40% exclusion of adjusted net capital gain from assets held more than three years, capped at $350,000 of excluded gain, a cap that's been in place since July 1, 2019. You pick whichever exclusion produces the bigger tax reduction for the year.

Because $350,000 is 40% of $875,000, the percentage exclusion effectively maxes out once your qualifying gain reaches $875,000. Every dollar of qualifying gain above that line is fully taxable at your ordinary bracket, with no further discount. For a business sale, a large timber tract, or a concentrated position that qualifies for the 40% treatment, that $875,000 breakpoint is the number to model against before assuming the exclusion covers the whole transaction.

Worked example: sell an asset held four years, not real estate, not publicly traded stock, for a $200,000 gain, and you're in Vermont's top bracket. The 40% option excludes $80,000, leaving $120,000 taxable, or $10,500 at 8.75%. The flat $5,000 option would leave $195,000 taxable, or $17,062.50, nearly $6,563 more. On a gain this size, the 40% option almost always wins, but for small gains under about $12,500, the flat $5,000 exclusion can actually exclude a larger share of the gain than 40% would.

The 40% exclusion doesn't apply to every kind of gain. The regulation specifically excludes three categories from the percentage option: gain from the sale of real estate used as a primary or non-primary residence, gain from depreciable personal property other than farm property and standing timber, and gain from stocks and bonds that are publicly traded or traded on an exchange or other financial instrument. Sell your house, a rental's furnishings, or a brokerage account position, and none of that gain gets the 40% treatment, though it can still use the flat $5,000 exclusion.

There's a specific carve-back worth knowing if you're in Vermont's farm and forestry economy: farm property and standing timber are depreciable personal property too, but the regulation exempts them from the general depreciable-property exclusion. That means qualifying farm equipment, farm real property, and standing timber held over three years remain eligible for the 40% exclusion even though most other depreciable property doesn't.

Vermont'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).

Put the two systems together and a high-income Vermont seller with a large, exclusion-eligible long-term gain can land near 25 to 27% combined once the federal 20% bracket, the 3.8% NIIT, and Vermont's discounted 40%-excluded state number are stacked. A short-term or non-qualifying gain at the top of both systems, real estate that doesn't qualify for the exclusion, for instance, can run well past that once Vermont's uncushioned 8.75% and federal ordinary rates are both in play.

The planning takeaway: anything that reduces your federal adjusted net capital gain, loss harvesting, timing a sale into a lower-income year, or an installment sale that spreads income across years, flows through to the Vermont number too, since both the state's ordinary-bracket base and its exclusion math key off the federal figure.

A rental sale in Vermont raises two separate questions, and neither has a fully settled answer without a closer read of your specific facts. First, the residence carve-out: the 40% exclusion doesn't reach real estate used as a primary or non-primary residence, and it isn't fully clear from public guidance whether a rental you've never personally occupied falls outside that carve-out or gets swept into it under the "non-primary residence" language. Second, recapture: the exclusion only reaches gain that counts as federal adjusted net capital gain, and depreciation recapture on a rental is generally treated as ordinary income federally, which raises the same eligibility question the 40% exclusion applies to statewide.

Until both points are confirmed against the regulation and current Department of Taxes guidance for your specific transaction, the conservative planning assumption for a Vermont rental sale is that the appreciation slice may or may not qualify for the 40% exclusion depending on how the property was used, and that recapture is very likely taxed in full at your ordinary Vermont bracket, same as most other states handle it.