Key Takeaways: Pennsylvania Capital Gains Tax
- Pennsylvania taxes all capital gains, regardless of holding period, as personal income at a flat rate of 3.07%. There is no distinction between short-term and long-term gains.
- Federal capital gains tax rates vary, based on how long you’ve held an asset and your income, with rates ranging from 0% to 20%. Plus, there’s a possible 3.8% Net Investment Income Tax for high earners.
- No primary residence exclusion exists in Pennsylvania. Even if you qualify for the federal $250,000/$500,000 home sale exemption, the entire gain may still be taxed at the state level.
- Inherited assets benefit from a step-up in cost basis, potentially reducing capital gains taxes when the assets are sold, but any appreciation after the original owner’s death is taxable.
- Pennsylvania does not recognize 1031 like-kind exchanges for deferring gains, even if the IRS allows you to defer federal taxes.
- Pennsylvania law is far more restrictive than federal law regarding the use of losses to offset gains. The state does not allow loss carryforwards and only recognizes finalized, profit-driven transactions, making tax-loss harvesting strategies far less effective.
Pennsylvania Capital Gains Tax: What You Need to Know
Capital gains taxes affect anyone who decides to sell their property, stocks, or other assets at a profit, not just large-scale traders. Even routine transactions can lead to taxable gains under certain conditions.
When you sell an asset for more than you originally paid, you create a gain that can be subject to both state and federal systems. Understanding how these rules apply can help you better anticipate your potential tax liability and plan accordingly.
Does Pennsylvania Tax Capital Gains?
Yes, Pennsylvania taxes capital gains as personal income. If you sell an asset for more than you originally paid, the profit is included in your taxable income at a flat rate of 3.07%.
1 Pennsylvania makes no distinction between short-term and long-term holdings, unlike the federal system, which reduces rates for long-term investments.
This treatment applies broadly to assets such as stocks, mutual funds, bonds, cryptocurrency, and real estate. Whether the gain originates from an investment portfolio or property sale, it’s reported as ordinary income on your Pennsylvania tax return.
For example, if you purchase a rental property for $180,000 and later sell it for $235,000, your $55,000 gain would be included in your taxable income for the year and taxed at Pennsylvania’s flat income tax rate of 3.07% regardless of how long you owned the asset. The same approach applies to capital gains from selling a business or other income-generating property.
Please Note: Some municipalities within Pennsylvania levy their own local earned income taxes on top of the state’s flat rate. Your total tax obligation could exceed 3.07%, depending on where you live or work. Always check with your local tax authority or consult a tax professional to understand the combined impact of state and local rules on your specific situation.
Understanding Federal Capital Gains Tax
Your investment profits can be significantly reduced depending on how they’re treated under federal taxes. The IRS divides capital gains into short-term and long-term categories based on how long you hold an asset before selling. These classifications determine the rate you’ll pay and are influenced by factors such as your income level, filing status, and even other types of investment income.
Below is a breakdown of what to expect and how timing can affect your outcome:
Short-Term Capital Gains: Profits from selling assets you’ve held for one year or less fall into this category. These short-term capital gains are taxed at your ordinary income rate on top of your wages, interest, and other taxable income. Depending on your overall earnings, this could place you inside higher tax brackets and result in rates ranging from 10% to 37% under 2025 federal guidelines. 2
Long-Term Capital Gains: When you hold an investment for longer than a year, your earnings may qualify for the lower, long-term capital gains rate. These rates are tied to your income and filing status, and for the 2025 tax year, break down into the following: 3
- 0% for individuals earning up to $48,350 (single or married filing separately), $64,750 (head of household), or $96,700 (married filing jointly)
- 15% for income between $48,351 and $533,400 (single), $48,351 to $300,000 (married filing separately), $64,751 to $566,700 (head of household), or $96,701 to $600,050 (married filing jointly)
- 20% for income over $533,400 (single), over $300,000 (married filing separately), over $566,700 (head of household), or over $600,050 (married filing jointly)
Net Investment Income Tax (NIIT) and Special Asset Categories: If your modified adjusted gross income (MAGI) exceeds certain thresholds, the IRS imposes an additional 3.8% tax known as the NIIT. This applies to the lesser of your net investment income or the amount by which your MAGI surpasses the applicable threshold.
Net investment income includes capital gains, dividends, interest, rental income, royalties, annuities, and income from passive business activities. However, it does not apply to wages or self-employment income, Social Security benefits, municipal bond interest, gains from the sale of a personal residence, or distributions from retirement accounts.
In addition, certain federal tax rules apply special treatment to collectibles—such as art, precious metals, or rare coins—which may be subject to a higher maximum long-term capital gains rate of 28%. 4
Other Exemptions, Deductions, and Special Scenarios
Certain transactions receive special treatment under federal or state tax rules, which can help reduce or defer the tax you owe on investment gains. These provisions vary depending on the asset type and your specific situation. Below are several scenarios worth understanding:
Primary Residence Exclusion: A long-standing federal rule allows homeowners to avoid paying taxes on a significant portion of the profit when selling their primary residence. Individuals can typically exclude up to $250,000 in capital gains, while married couples filing jointly may exclude up to $500,000.
To use this exclusion, the home must have been both owned and used as a main residence for at least two years during the five-year period before the sale. 5 This exclusion only applies to your federal capital gains tax bill. So even if you owe nothing to the IRS, the gain may still be subject to Pennsylvania’s flat state taxes.
Step-Up in Basis for Inherited Assets: When you inherit property or investments, their cost basis resets to the fair market value on the date of the decedent’s death. This “step-up in basis” eliminates the taxable gain if the asset is sold soon after it is inherited. Pennsylvania generally follows this federal approach.
Tax-Advantaged Accounts: Gains in IRAs, 401(k)s, and HSAs are generally not taxable at the time they’re earned. Withdrawals, however, can become taxable events. Depending on the type of account, you might owe Pennsylvania taxes on distributions, but any capital gains within the account are deferred.
1031 Like-Kind Exchanges: While the federal system allows certain real estate swaps to defer capital gains taxes, Pennsylvania does not. You could end up deferring your federal capital gains tax but still owe the 3.07% to the state in the year of the exchange.
Calculating Capital Gains on Property and Investments
When selling property, especially real estate, calculate your taxable gain accurately. Start with your purchase price and add qualifying improvements, closing costs, commissions, and fees to establish your adjusted cost basis. A higher basis results in a lower capital gain.
If you’ve claimed depreciation deductions, they are “recaptured” when the property is sold and increase your taxable income. Pennsylvania typically follows the IRS in this regard.
For investments like stocks, mutual funds, or ETFs, corporate actions such as stock splits or returns of capital may affect your basis. Maintaining accurate records is essential for avoiding overstated gains.
While Pennsylvania’s tax system is simpler, timing large asset sales in a low-income year can reduce your combined state and federal exposure.
Strategies to Reduce Capital Gains Taxes
Even with rigid tax laws, there are smart ways to reduce your liability. Timing, structure, and type of asset can all matter. Here are several strategies:
Long-Term Holding: Pennsylvania uses a flat rate, but the IRS favors long-term holdings. Holding an asset for more than one year can qualify you for lower federal rates.
Tax-Loss Considerations: Pennsylvania doesn’t allow loss carryforwards or mixing of gains/losses across categories or spouses. 6 Even if you harvest losses for federal purposes, it won’t affect your Pennsylvania taxes.
Installment Sales: Spreading income across years by structuring a sale as an installment can keep you in a lower federal bracket. It doesn’t change the Pennsylvania flat rate but can benefit your overall plan.
Charitable Donations: Donating appreciated assets (like stocks or real estate) to a 501(c)(3) charity can help you avoid capital gains and earn a federal deduction. Pennsylvania doesn’t offer a similar tax break, but federal benefits may still make it worthwhile.
Gifting Appreciated Assets: Gifting assets to a family member in a lower tax bracket may reduce your household’s overall tax liability. They inherit your cost basis, and Pennsylvania applies its flat tax to any future gain upon sale.
Please Note: Pennsylvania’s tax rules change from time to time. Staying informed helps you spot new opportunities or avoid surprises.
Pennsylvania Capital Gains Tax (FAQs)
Are capital gains taxed separately in Pennsylvania or included in regular income?
In Pennsylvania, capital gains are treated as ordinary income and taxed at a flat rate of 3.07%. The state does not impose a separate rate or category, nor does it distinguish between short-term and long-term holdings. Whether the gain comes from selling real estate, stocks, mutual funds, cryptocurrency, or other investments, it’s taxed the same as your other personal income.
Do I have to pay Pennsylvania capital gains tax if I sell property in another state?
Yes. As a resident of Pennsylvania, you must report and pay state tax on all income you receive, no matter where it comes from or where the asset was located when sold. This includes profits from selling out-of-state real estate, business interests, or investment assets.
Does Pennsylvania tax cryptocurrency gains?
Yes, gains from selling or exchanging cryptocurrency are considered taxable in Pennsylvania. The state views digital assets as property, not currency, which means any gain you realize from selling or trading crypto is treated like a capital gain and taxed at the same flat income tax rate.
Can I deduct capital losses on my Pennsylvania return?
Not in the way you might expect. While the federal tax code allows you to use capital losses to offset gains and even carry forward unused losses into future tax years, Pennsylvania’s rules are far more restrictive.
Losses must come from finalized, profit-driven transactions (like the sale of investments or rental properties), and they can only be recognized in the year the transaction occurs. Losses can’t be carried forward or used to offset other types of income, even between spouses.
What kind of documentation should I keep to calculate capital gains in Pennsylvania?
Maintain records of your original purchase price, closing statements, improvement costs, depreciation taken, dividends, stock splits, and any returns of capital. These details are essential for calculating your adjusted cost basis and ensuring accuracy on your return.
Are capital gains from selling inherited property taxed in Pennsylvania?
Potentially. If you sell the inherited asset, only the appreciation after the decedent’s date of death is taxable. The stepped-up basis means most of the gain is erased, but timing and further appreciation can still trigger Pennsylvania tax.
How does Pennsylvania treat gains from selling a primary residence?
Unlike the federal government, Pennsylvania does not offer a home sale exclusion. Even if you qualify for the federal $250,000 (single) or $500,000 (married filing jointly) exemption, the gain is still taxable in Pennsylvania.
Does Pennsylvania recognize 1031 exchanges for deferring capital gains?
No. While 1031 exchanges can defer federal capital gains tax, Pennsylvania does not follow this rule. You may still owe state tax on the gain in the year of the exchange, even if you defer it federally.
If I move out of Pennsylvania after a sale, do I still owe capital gains tax?
It depends on the timing. If you were a Pennsylvania resident when the sale closed, the gain is taxable in Pennsylvania. If you completed the sale after moving and changing residency, it may not be taxable. Keep good records to prove your residency change.
We Help with Capital Gains Tax Planning in Pennsylvania
Whether you’re selling a home, investment property, or a portfolio of stocks and digital assets, understanding how Pennsylvania treats capital gains is an important part of staying financially prepared.
Profits from asset sales are taxed as personal income at a flat rate, regardless of how long you held the asset. This may seem simple, but the rules can still create surprises — especially when layered with federal tax law.
The sales price, timing, and structure of a transaction all influence how much you ultimately keep. Some gains may be exempt under specific rules, while others can unexpectedly increase your taxable income.
That’s where thoughtful guidance comes in. Our team can help you make smart decisions around selling appreciated assets, managing taxes across multiple years, and aligning your strategy with your broader financial plan.
Schedule a complimentary consultation with us today to get started.
Resources:
John, a New Hope, Pennsylvania native, is the Founder and CEO of Rockwood Wealth Management. A former nuclear engineer, he is committed to the development and growth of conflict-free comprehensive financial planning and investment management. John values a client-centric practice and unwavering integrity in all of our endeavors as stewards of our clients' best interests.