Capital gains tax in Kentucky is charged at the same flat rate as wages and other income: 3.5% for the 2026 tax year, down from 4% in 2025. The state does not offer a lower rate for long-term holdings, so the federal 0%, 15%, and 20% brackets on assets held more than a year have no effect on what you owe Kentucky. A gain on stock you flipped in a week and a gain on a rental you owned for two decades are treated the same way at the state level.
How the Gain Is Calculated
Kentucky’s individual income tax return starts with your federal adjusted gross income, which already includes the net capital gain or loss from your federal Schedule D. That figure flows onto Line 5 of Form 740, and Kentucky then applies a short list of state-specific adjustments on Schedule M before taxing the result.1Commonwealth of Kentucky Department of Revenue. 2025 Kentucky Individual Income Tax Instructions for Form 740
Because Kentucky’s tax code conforms to the Internal Revenue Code as of December 31, 2024, the state uses federal rules to define capital assets, compute adjusted basis, and measure holding periods.2Department of Revenue. Individual Income Tax You don’t recalculate any of that separately for Kentucky unless a specific adjustment applies. Your adjusted basis is generally your purchase price, plus capital improvements, minus any depreciation claimed.
The 3.5% Rate for 2026
For taxable years beginning on or after January 1, 2026, the individual income tax rate is 3.5%.3Kentucky Legislative Research Commission. Kentucky Revised Statutes 141.020 – Levy of Income Tax on Individuals, Rate of Normal Tax A $50,000 net capital gain with no other state adjustments produces $1,750 of Kentucky tax.
The rate has been dropping steadily. It was 5% as recently as 2022. Further reductions for 2027 and beyond are possible but conditional: the Office of State Budget Director has to certify that the budget reserve trust fund holds at least 10% of general fund receipts and that revenue exceeds appropriations by a defined threshold.4Kentucky Legislative Research Commission. HB 13 – An Act Relating to the Individual Income Tax Rate If those tests are met, the General Assembly can cut the rate another 0.25% to 0.5%. Until that happens, plan around 3.5%.
Losses, Inherited Property, and Digital Assets
If your capital losses exceed your capital gains for the year, you can deduct up to $3,000 of the net loss against other income ($1,500 if married filing separately), and any remaining loss carries forward. Kentucky follows this federal rule.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses The wash sale rule applies the same way as on your federal return: a loss disallowed federally stays disallowed for Kentucky.
Inherited assets get a stepped-up basis. Your basis is generally the fair market value on the date of the decedent’s death, which often erases years of unrealized appreciation. Gifted assets are different: you take the donor’s original basis, so the built-in gain transfers to you. Kentucky also has a separate inheritance tax on certain beneficiaries, with rates of 4% to 16% for more distant relatives and unrelated beneficiaries; spouses, children, grandchildren, parents, and siblings are exempt. That tax hits the transfer itself, not a later capital gain from selling what you received.
The state has issued no separate guidance on cryptocurrency. Under IRC conformity, digital assets are property, and gains flow through the same federal forms as any other capital asset.
Kentucky-Specific Exemptions and Adjustments
A handful of Schedule M items can change your Kentucky bill. These are the ones that actually matter for capital gains.
Sale of a Primary Residence
Kentucky follows the federal exclusion on the sale of a main home. If you meet the ownership and use tests (owning and living in the home for at least two of the five years before the sale), you can exclude up to $250,000 of gain as a single filer or $500,000 on a joint return.6Internal Revenue Service. Topic No. 701, Sale of Your Home The exclusion happens on the federal return and reduces federal AGI before it ever reaches your Kentucky forms, so no separate state claim is needed.
Property Taken by Eminent Domain
Gains on property taken by eminent domain can be subtracted on Schedule M as an “other subtraction,” with a detailed schedule attached.1Commonwealth of Kentucky Department of Revenue. 2025 Kentucky Individual Income Tax Instructions for Form 740 This is a state-only benefit; there is no federal equivalent.
Depreciation Recapture Differences
This one catches people. If you claimed federal bonus depreciation or an increased Section 179 deduction on an asset placed in service after September 10, 2001, Kentucky may not have allowed the same deduction. When you later sell that asset, you have to recompute the gain or loss using Kentucky’s depreciation figures.1Commonwealth of Kentucky Department of Revenue. 2025 Kentucky Individual Income Tax Instructions for Form 740
You do that by preparing “Kentucky” versions of federal Form 4562 and Schedule D or Form 4797, writing “Kentucky” at the top of each. You compute the gain or loss using your Kentucky basis, then report the difference between the federal and Kentucky amounts on Schedule M. Real estate investors and business owners who took accelerated depreciation are the ones most likely to encounter this.
U.S. Government Bond Interest
Interest on U.S. Treasury bonds, savings bonds, and similar federal securities is exempt from Kentucky tax. If your federal AGI includes any, subtract it on Schedule M.7Kentucky Department of Revenue. 103 KAR 1:130 – Taxation of Federal and Certain Nonfederal Obligations It isn’t a capital gains adjustment, but it commonly appears on returns that also report investment gains.
If You Don’t Live in Kentucky
Whether Kentucky taxes a nonresident’s capital gain depends on the type of asset. The state taxes nonresidents on income from tangible property located in Kentucky and on intangible property that has acquired a business situs there. By statute, intangible personal property is sited at the residence of its beneficial owner.3Kentucky Legislative Research Commission. Kentucky Revised Statutes 141.020 – Levy of Income Tax on Individuals, Rate of Normal Tax
The practical result: an Ohio resident who sells Kentucky farmland at a profit owes Kentucky tax on the gain. An Ohio resident who sells shares of a publicly traded company owes Kentucky nothing on that sale, regardless of where the company is headquartered, because the stock is intangible property sited at the Ohio residence.
Part-year residents split their reporting. If you moved into Kentucky during the year, you report income from Kentucky sources for the pre-move period and income from all sources afterward; moving out reverses that. Gains on tangible Kentucky property are reported no matter when the sale occurred, while gains on intangibles like stock generally belong to whichever state you lived in at the time of the sale.8Department of Revenue. 2025 Kentucky Income Tax Instructions for Form 740-NP Nonresident or Part-Year Resident Nonresidents and part-year residents file Form 740-NP.
Estimated Tax on a Large Gain
A one-time capital gain can push you into the state’s estimated tax requirements. If you expect to owe more than $500 in Kentucky income tax after withholding and credits, you’re required to make quarterly estimated payments, due April 15, June 15, September 15, and January 15 of the following year.9Kentucky Legislative Research Commission. Kentucky Revised Statutes 141.305 – Estimated Income Tax Payments
The underpayment penalty runs at 9% for 2026 payment periods and applies if you haven’t prepaid at least 70% of your actual liability by year end.10Commonwealth of Kentucky Department of Revenue. Form 2210-K (2025) – Underpayment of Estimated Tax by Individuals If a gain hits mid-year and you weren’t already making estimated payments, a larger payment for the remaining quarters can often reduce or avoid the penalty. Form 2210-K lays out the math and the exceptions.
Where the Numbers Go on Your Return
Kentucky has no equivalent of federal Schedule D. Your net capital gain or loss is already inside the federal AGI you report on Line 5 of Form 740. Schedule M then handles the additions and subtractions: additions in Part I, subtractions in Part II. Capital gains adjustments most commonly show up as an eminent domain subtraction or as a depreciation-related addition or subtraction for assets placed in service after September 10, 2001. When a depreciation adjustment applies, attach the Kentucky versions of Form 4562, Schedule D, and Form 4797 showing your computation.
After Schedule M, the result is your Kentucky adjusted gross income. Subtract the standard or itemized deduction, apply the 3.5% rate, and claim any credits. Form 740, or Form 740-NP for nonresidents, goes to the Kentucky Department of Revenue with the supporting schedules.