When you sell a capital asset, you might have a taxable capital gain or deductible loss on the transaction. For federal tax purposes, the Internal Revenue Service requires itemization of capital gains on Form 1040, Schedule D and sets different tax rates depending on how long you held the asset and your personal tax bracket. As for the states, capital gains tax treatment varies. Some states, including Tennessee, do not levy their own capital gains taxes. North Carolina belongs to the family of states that sets its own capital gains rate and thus a combined state and federal rate for its residents.
Capital Gains Rates in North Carolina
When the sale of an asset such as a house, investment or major purchase such as a boat or car generates a profit, the seller has a capital gain. Although residents of North Carolina pay both income and capital gains taxes at the state level, a single rate created by law in 2013 simplifies the process of calculating taxes. There's only one tax bracket -- the rate levied is a flat 5.8 percent -- and the rate applies to wages and all other income, including capital gains. This rate places North Carolina in the mid-range as far as state capital gains rates go. The lowest charged is 0 percent in Alaska, Nevada, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. The top state rate as of 2015 is 13.3 percent, charged in California.
Exemptions and Exceptions
States are free to set their own rules and rates on capital gains. They also may allow exemptions, either for the taxpayer or for the asset. In Wisconsin, for example, 30 percent of the capital gain is exempt from taxation. The same rule in South Carolina raises the exemption amount to 44 percent. In North Carolina, there's no general exemption set -- all of the gain is included in income and subject to tax. The state does allow investors to deduct any gain from the sale of North Carolina municipal bonds issued before 1995, if state law specifically exempted the bonds from capital gains tax. In addition, the state exempts all income earned by members of federally recognized Indian tribes, as long as the income was earned on a federally recognized Indian reservation.
Like many states, North Carolina does not require an itemization of capital gains transactions on its personal income tax return. Instead, residents simply declare the adjusted gross income calculated on the federal return, which includes capital gains as well as deductible losses, and enter that number to calculate their North Carolina taxes. In contrast to the federal rules, North Carolina does not allow investment-related deductions such as advisory and investment fees, which can be claimed as itemized deductions on the federal Schedule A.
Combining and Comparing
North Carolinians face a combined top state and federal capital gains tax rate of 28.50 percent. This would apply to short-term gains, held for less than a year, and to taxpayers who have reached the top federal tax bracket and are subject to an additional tax on investment income as a result of the Affordable Care Act, passed in 2010. North Carolina's top rate compares to 28.6 percent charged in Georgia and 27.30 in South Carolina.