On May 7, 2025, Missouri made headlines by becoming the first state in the U.S. to eliminate the individual income tax on capital gains.
This bold move has significant implications not only for Missouri residents but also for broader conversations around state-level tax reform across the country.
What Is a Capital Gains Tax?
Capital gains taxes are levied on the profits from selling assets like stocks, real estate, or businesses. While these gains are still subject to federal taxation, most states—including Missouri, until now—also taxed them at the state level as part of personal income.
Starting in 2025, Missouri taxpayers will be able to deduct 100% of their federal capital gains income from their state income taxes.
Who Benefits From This Change?
This change primarily benefits:
- Investors: Those selling stocks, ETFs, or other assets at a gain
- Real Estate Owners: Individuals profiting from property sales
- Small Business Owners: Entrepreneurs exiting or selling businesses
Example: If a Missouri resident earns $100,000 in long-term capital gains, they will now only owe federal taxes on that income—not state income tax.
Why Missouri Made This Move
Supporters of the new law argue that it will:
- Encourage economic growth by making Missouri more competitive
- Attract high-net-worth individuals and new business investment
- Reward long-term investing and asset building
While proponents see this as a win for growth, critics caution that the move could reduce state revenue by $262 million to $600 million annually, potentially impacting funding for education, infrastructure, and healthcare.
Could Other States Follow?
Missouri’s decision may inspire other states to reevaluate their capital gains policies—especially those looking to attract residents and businesses from higher-tax states like California, New York, and Illinois.
Currently, 8 states—including Texas, Florida, and Tennessee—already have no personal income tax. Missouri’s move could add pressure for others to explore partial or full capital gains exemptions.
What About Federal Taxes?
It’s important to note that federal capital gains tax still applies. Depending on your income and holding period, you may owe between 0% and 20% (plus the 3.8% Net Investment Income Tax for some).
Missouri’s change only affects your state tax return. You’ll still report and pay capital gains to the IRS.
What This Means for You
If you’re a Missouri resident, this new law opens the door to potential tax savings—especially if you’re planning to sell investments or real estate in 2025 and beyond.
If you’re not in Missouri, this change is still worth watching. It may influence tax policy shifts in other states, especially as more states look to become tax-friendly destinations for high earners and business owners.
Additional Resources:
- AP News: Missouri Passes Capital Gains Tax Elimination
- Missouri Independent Coverage
- IRS: Topic No. 409 Capital Gains and Losses
FAQ
Does this mean capital gains are completely tax-free for Missouri residents?
No. Missouri has eliminated capital gains from state income tax, but you still owe federal capital gains tax.
When does the Missouri capital gains tax elimination take effect?
It applies to income reported in the 2025 tax year—meaning you’ll see the impact when you file your return in 2026.
Can businesses also deduct capital gains under the new law?
Not yet. A future exemption for corporations is tied to other tax rate reductions and is unlikely before 2030.
Will other states adopt similar policies?
Possibly. Missouri’s decision could inspire other states—especially those with flat or low income taxes—to consider similar reforms.
Amro Badran, EA, is the Managing Partner of Badran Tax,
With over 40 years of experience and accreditation as a Federal Enrolled Agent,
Amro Badran and his team of tax professionals specialize in helping individuals and businesses resolve complex IRS & state tax issues and controversies.
Experienced and Trusted Tax Resolution Firm based in New Brunswick, NJ.
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