Vermont takes a unique approach to taxing capital gains, blending both a flat exclusion limit and ordinary income tax treatment. As of 2025, Vermont allows a limited exclusion for certain long-term capital gains, but all remaining gains are taxed at the state’s progressive income tax rates. For investors, real estate owners, and business sellers, it is critical to understand how Vermont calculates capital gains—and how quickly state taxes can add up when large assets are sold. This guide outlines federal and state rules for Vermont capital gains in 2025 and strategies you can use to reduce overall tax exposure.
What Are Capital Gains?
Capital gains are the profits realized when you sell an asset—such as stocks, real estate, a business, or cryptocurrency—for more than you originally paid.
Only realized gains are taxable. Unrealized gains—growth in asset value before selling—are not taxed.
Short-Term vs. Long-Term Capital Gains
For federal tax purposes:
- Short-term capital gains: Held one year or less, taxed at ordinary federal income tax rates.
- Long-term capital gains: Held more than one year, taxed at preferential federal rates.
Vermont does not offer a preferential long-term rate, but it does allow a small exclusion for certain types of long-term gains.
Federal Capital Gains Tax (2025)
Short-Term Capital Gains
Taxed as ordinary income according to federal brackets:
| Taxable Income (Single) | Taxable Income (Married Joint) | Rate |
|---|---|---|
| $0 to $11,925 | $0 to $23,850 | 10% |
| $11,925 to $48,475 | $23,850 to $96,950 | 12% |
| $48,475 to $103,350 | $96,950 to $206,700 | 22% |
| $103,350 to $197,300 | $206,700 to $394,600 | 24% |
| $197,300 to $250,525 | $394,600 to $501,050 | 32% |
| $250,525 to $626,350 | $501,050 to $751,600 | 35% |
| $626,350+ | $751,600+ | 37% |
Long-Term Capital Gains
| Taxable Income (Single) | Taxable Income (Married Joint) | Rate |
|---|---|---|
| $0 to $48,350 | $0 to $96,700 | 0% |
| $48,350 to $533,400 | $96,700 to $600,050 | 15% |
| $533,400+ | $600,050+ | 20% |
Additional federal rules include:
- Depreciation recapture tax (25%)
- Collectibles taxed up to 28%
- NIIT (3.8%) for incomes above
- $200,000 (single)
- $250,000 (married filing jointly)
Vermont Capital Gains Tax in 2025
Vermont taxes most capital gains as ordinary income, but it provides a limited exclusion.
Vermont Income Tax Rates (2025)
Vermont uses progressive income tax brackets ranging from:
- 3.35%
- 6.6%
- 7.6%
- 8.75%
Most high-income earners fall into the 7.6% or 8.75% bracket.
Vermont Capital Gains Exclusion
Vermont offers:
Up to $5,000 per year of capital gains exclusion
OR
40% exclusion of gain on the sale of certain business assets
(whichever is greater), subject to detailed requirements.
Key points:
- The $5,000 exclusion applies broadly to most types of capital gains.
- The 40% exclusion is limited to the sale of qualifying business assets, not stock.
- Real estate, publicly traded stock, and intangible assets do not qualify for the 40% exclusion.
- All remaining capital gains are taxed at Vermont’s standard income tax rates.
Effective State Capital Gains Tax Rate
For most investors:
- Effective rate ≈ 3.35% to 8.75%
- Most high-income earners pay 8.75% on capital gains after the exclusion
Vermont’s exclusion is modest, meaning large capital gains are taxed similarly to wages.
Case Study: Vermont Capital Gains Example
Scenario:
Samantha, a Vermont resident, purchased 5,000 shares of stock at $30 in 2018 and sells them in 2025 for $100.
Total gain:
5,000 × $70 = $350,000
Federal Taxes
Samantha falls into the 15% federal long-term capital gains bracket:
- Federal long-term tax:
$350,000 × 15% = $52,500
NIIT applies to $150,000 of the gain:
- NIIT:
$150,000 × 3.8% = $5,700
Total federal tax: $58,200
Vermont State Taxes
Vermont allows a $5,000 exclusion:
- Taxable gain:
$350,000 − $5,000 = $345,000
Assuming Samantha is in the 8.75% bracket:
- Vermont state tax:
$345,000 × 8.75% = $30,187.50
Total Tax Liability
- Federal: $58,200
- State: $30,187.50
- Total: $88,387.50
Vermont’s exclusion does little to offset large capital gains.
Strategies to Reduce Capital Gains Taxes in Vermont
1. Use the 40% Business Asset Exclusion
Applies only to the sale of qualifying business assets—not stock—and can significantly reduce taxable gain for business owners.
2. Take Advantage of Tax-Loss Harvesting
Sell underperforming investments to offset gains.
3. Maximize Retirement Contributions
Traditional IRA and 401(k) contributions reduce federal taxable income and may reduce Vermont bracket placement.
4. Consider Charitable Strategies
Charitable remainder trusts (CRTs) and donor-advised funds (DAFs) help avoid or defer capital gains.
5. Evaluate Opportunity Zone Investments
Federal rules may allow deferral or exclusion of certain gains.
6. Strategically Time Large Sales
Selling during a lower-income year can reduce federal long-term bracket impact and NIIT liability.
Vermont’s combination of high tax rates and limited exclusions makes strategic tax planning essential before selling appreciated assets. Because every situation is different, consider consulting a qualified tax professional or financial advisor to determine the most effective strategy for your financial goals.