Capital Gains Tax in Massachusetts: Rates, Surtax, and Exclusions

Massachusetts capital gains tax runs at two main rates: 8.5% on short-term gains and 5% on long-term gains, with an extra 4% surtax layered on top of any taxable income above $1,083,150 for 2025.¹² Collectibles follow their own path, capital losses are capped more tightly than under federal rules, and inherited property gets a stepped-up basis. The details below tell you which rate applies to your sale, how to report it, and where the state parts ways with federal treatment.

Short-Term vs Long-Term: What You Pay and Why

The holding period is the same as the federal rule. Hold an asset for one year or less and the profit is a short-term capital gain, taxed at 8.5%. Hold it for more than one year and it becomes a long-term capital gain, taxed at 5%, which matches the state’s flat rate on wages and most other income.¹

Behind the rates sits a sorting system. Massachusetts divides personal income into parts: short-term capital gains and long-term gains on collectibles land in Part A income, while standard long-term capital gains are Part C income.³ That classification controls which schedule you file and how losses from one bucket can offset gains in another. The 3.5-point spread between short-term and long-term rates is real money on larger sales, so keep brokerage statements and trade confirmations that show your acquisition date; misclassifying a short-term sale as long-term invites underpayment and penalties.

The federal definition of a capital asset under 26 U.S.C. § 1221 carries over, since the state return starts from federal adjusted gross income. Inventory, property held mainly for sale to customers, and certain other business property are not capital assets.⁴

Collectibles Are Taxed Differently

Long-term gains on collectibles sit with short-term gains in Part A, not with regular long-term gains in Part C. Collectibles here means works of art, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages as defined under IRC § 408(m). The offset: Massachusetts allows a 50% deduction on long-term collectibles gains held for more than one year.³ Because only half the gain is taxed at the 8.5% rate, the effective rate on a long-term collectibles gain is roughly 4.25% before any surtax.

The 4% Surtax on Taxable Income Above $1.08 Million

Since 2023, Massachusetts has added a 4% surtax on taxable income above a threshold that adjusts for inflation. For 2025, the threshold is $1,083,150.² The Department of Revenue publishes the updated figure each year.

Capital gains count toward that total. A one-time event, like selling a business, a second home, or a concentrated stock position, can push you over the line even when your regular income sits well below the threshold. A taxpayer with $200,000 in wages who realizes $1 million in long-term capital gains in one year would owe the extra 4% on the portion above $1,083,150. Stacked on the base rates, the combined state rate reaches 12.5% on short-term gains and 9% on long-term gains for income above the threshold.

The surtax applies to your total Massachusetts taxable income, not separately to each income type. Spreading a large sale across two tax years, when the deal structure allows it, can keep you below the threshold in both years.

Exclusions That Can Shrink or Erase the Gain

Selling Your Home

Massachusetts conforms to the federal exclusion under IRC § 121 on the sale of a principal residence. You can exclude up to $250,000 of gain, or $500,000 if you’re married filing jointly, provided you owned and used the home as your principal residence for at least two of the five years before the sale.⁵⁶ For joint filers, only one spouse has to meet both the ownership and use tests.

Qualified Small Business Stock

Massachusetts follows the federal exclusion for gains from qualified small business stock under IRC § 1202. For QSBS acquired after September 27, 2010, up to 100% of eligible gain can be excluded. The stock must come from a C corporation with aggregate gross assets under $50 million, and you must have held it at least five years. This matters most to founders and early-stage investors.

Inherited Property

When you inherit an asset, its basis generally resets to fair market value on the date of the original owner’s death under 26 U.S.C. § 1014, and Massachusetts follows that basis.⁷ If a parent bought a home for $150,000 and it was worth $600,000 at death, your basis is $600,000. Sell for $625,000 and your taxable gain is $25,000, not $475,000. The step-up covers real estate, stocks, bonds, business interests, and most other inherited property, and it happens at death regardless of when you later sell.

Capital Losses: Lower Cap Than the Federal Rules

Massachusetts handles losses in a specific order. Short-term losses first offset short-term gains, long-term losses first offset long-term gains, and any excess can then cross over to the other category.⁸

The cap on losses deducted against interest and dividend income is $2,000 per year, lower than the federal $3,000 limit against ordinary income.³ Unused losses carry forward. Many taxpayers assume the federal cap applies at the state level and overstate their current-year deduction.

Federal wash sale treatment flows through. If a loss is disallowed federally because you repurchased a substantially identical security within 30 days before or after the sale, the reduced loss is what carries into your Massachusetts calculation.

Where Capital Gains Go on Your Massachusetts Return

Capital gains are split across two schedules, and mixing them up is a common filing error.

Schedule B handles short-term capital gains and losses, long-term gains on collectibles, pre-1996 installment sale gains, carryover short-term losses, and gains or losses from trade or business property.
Schedule D handles long-term capital gains and losses excluding collectibles, including capital gain distributions from mutual funds and real estate investment trusts.

Both feed into Form 1, the main individual return.⁹ On Schedule D, net long-term gains are multiplied by the 5% rate to produce the tax.¹⁰ Installment sales completed between January 1, 1996 and December 31, 2002 go on Schedule D-IS instead; installment sales after January 1, 2003 use the regular Schedule D.¹¹

Investment Expenses: A Massachusetts-Only Deduction

The federal Tax Cuts and Jobs Act suspended miscellaneous itemized deductions for investment advisory fees and similar expenses through 2025. Massachusetts did not adopt that change.¹² Qualifying investment management costs may still be deductible on your state return even when they aren’t deductible federally. Keep statements from your advisors to substantiate the deduction.

The Federal Net Investment Income Tax Sits On Top

High earners also face a federal 3.8% Net Investment Income Tax on net investment income when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.¹³ NIIT is a separate federal levy and doesn’t appear on your Massachusetts return, but it raises the total bill on gains. For a top-bracket seller, federal rates, NIIT, and the Massachusetts surtax together can push the combined effective rate above 30%.

Penalties for Late Filing or Underpayment

Massachusetts charges 1% per month for late filing, late payment, and failure to pay assessed taxes, up to 25% for each type of violation.¹⁴ The penalties stack: a failure-to-file penalty and a failure-to-pay penalty can both apply to the same balance. Interest accrues on any unpaid tax until the account is settled.¹⁵ If the Department of Revenue determines a return was false, fraudulent, or filed with willful intent to evade tax, the Commissioner can assess up to double the tax owed on top of other penalties, and criminal charges carrying fines and imprisonment are possible for intentional evasion.

1
Mass.gov. Massachusetts Tax Rates
2
Mass.gov. Massachusetts 4% Surtax on Taxable Income
3
General Court of Massachusetts. Massachusetts General Laws Chapter 62 Section 2
4
Office of the Law Revision Counsel. 26 USC 1221 – Capital Asset Defined
5
Governor’s FY26 Budget Recommendation. 1.021 Exemption of Capital Gains on Home Sales
6
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
7
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
8
Mass.gov. TIR 02-21 – Capital Gains and Losses – Massachusetts Tax Law Changes
9
Mass.gov. Form 1 2024 Massachusetts Instructions
10
Mass.gov. Schedule D Long-Term Capital Gains and Losses Excluding Collectibles and Pre-1996 Installment Sales
11
Mass.gov. Schedule D-IS Instructions
12
Mass.gov. Working Draft TIR – Massachusetts Conformity to Certain Provisions in Public Law No 119-21
13
Internal Revenue Service. Topic No 559 – Net Investment Income Tax
14
General Court of Massachusetts. Massachusetts General Laws Chapter 62C Section 33
15
Mass.gov. 830 CMR 62C.33.1 – Interest, Penalties, and Application of Payments