Page 1

Reg. §1.5811(21)(B)(ii) Capital Gains Exclusion (Effective Date: 3/11/14) Reg. §1.5811(21)(B)(ii) - 1 Statutory Framework Vermont individual income tax is imposed on the taxable income earned or received in the tax year by every individual, estate, and trust, subject to income taxation under the laws of the United States. Taxable income is defined in 32 V.S.A. § 5811.(21) as federal taxable income with certain additions and subtractions. Federal taxable income is decreased by the following capital gain income to arrive at Vermont taxable income: (1) The first $5000 of adjusted net capital gain income or (2) 40 percent of adjusted net capital gain income from the sale of assets held by the taxpayer for more than 3 years except from the sale of the following: (a) Any real estate or portion of _real estate used by the taxpayer as a primary or non- primary residence, (b) Depreciable personal property other than farm property and standing timber, and (c) Stocks and bonds publicly traded or traded on an exchange or any other financial instruments. The total amount of decrease due to capital gains exclusions cannot exceed 40 percent of federal taxable income. A taxpayer may choose the exclusion that results in the greater tax reduction, but may not take both the $5000 and 40 percent exclusion in one tax year. The $?000 exclusion may be applied against all types of adjusted net capital gain income. In no case may the exclusion exceed the taxpayer's adjusted net capital gain. The 40 percent exclusion is limited both as to the type of asset generating the gain and the length of time the asset was held.· Reg. §1.5811(21)(B)(ii) - 2 Exclusion Limited to Adjusted Net Capital Gain Income Only capital gain income that is adjusted net capital gain income as that term is defined in Section l(h) of the Internal Revenue Code is eligible for the Vermont exclusion. Adjusted net capital gain does not include income short term gain but includes most long term capital gain. Adjusted net capital gain income does not include section 1250 gain or 28 percent gain. IRC§1(h)(3). Section 1250· gain is realized on the sale of depreciable real estate and is taxed at a 25 percent maximum federal capital g~ins rate (or less i.n some cases). Unrecaptured 1250 gains are only realized when there is a net Section 1231 gain that is not subject to recapture as ordinary income. ·' 1