Vermont Capital Gains Tax: Rates, the 40% Exclusion, and Strategy

What Is the Vermont Capital Gains Tax Rate for 2024?

Vermont taxes capital gains as ordinary income at the state level, with a top marginal rate of 8.75% on income above $213,150 for single filers in 2024. Stack that on top of the 20% federal long-term rate plus the 3.8% Net Investment Income Tax, and high-net-worth Vermont residents face a combined marginal rate above 32% on qualifying gains. That number matters before any large liquidity event.

The state does offer a 40% exclusion on qualifying gains, but the asset requirements and income phase-outs mean most FATFIRE-level investors will not see the full benefit. Understanding exactly where you fall in that structure is the starting point for any serious pre-sale planning.

How Vermont Capital Gains Tax Works: The Core Structure

Vermont taxes capital gains as ordinary income under 32 V.S.A. § 5811. There is no separate, preferential state rate for long-term gains. Whether you held an asset for 13 months or 13 years, Vermont applies the same graduated income tax schedule.

This diverges sharply from federal treatment. Under IRS Publication 544, the federal system distinguishes short-term gains (held one year or less, taxed as ordinary income) from long-term gains (held more than one year, taxed at 0%, 15%, or 20% depending on income). Vermont ignores that distinction entirely.

Vermont's 2024 income tax brackets for single filers:

For married filing jointly, the top bracket begins at $259,500.

If you are a Vermont resident with a concentrated position or a pending business exit, your capital gain gets layered on top of your existing ordinary income. A $3M gain does not get taxed at 8.75% in isolation. It gets added to your other Vermont taxable income, and the portion that pushes total income above $213,150 hits the top rate. For most FATFIRE-level events, the effective Vermont rate on the incremental gain will be close to 8.75%.

The combined federal and Vermont burden, per Tax Foundation data, places Vermont among the higher combined capital gains tax states in New England.

Does Vermont Tax Long-Term and Short-Term Capital Gains at Different Rates?

No. Vermont applies the same ordinary income rates to both short-term and long-term gains. This is one of the most consequential structural differences between Vermont and the federal system, and it catches investors accustomed to federal planning assumptions off guard.

At the federal level, holding an asset beyond one year drops your rate from ordinary income rates (up to 37%) to preferential long-term rates (0%, 15%, or 20%). Vermont provides no equivalent benefit. A stock position held for 18 months and one held for 18 days receive identical Vermont tax treatment.

The practical implication: the standard advice to "hold for long-term treatment" reduces your federal bill but does nothing for your Vermont bill. For a Vermont resident in the top bracket selling a $5M appreciated position, the Vermont component is fixed at 8.75% regardless of holding period.

This also affects how you model after-tax returns on Vermont real estate, private equity distributions, and business exits. Standard 60/40 or long-term capital gains planning frameworks are built on federal assumptions. Vermont requires a separate overlay.

The one partial offset: Vermont does conform to the federal primary residence exclusion under IRS Publication 523, allowing single filers to exclude up to $250,000 and married filers up to $500,000 of gain on a qualifying home sale. Vermont generally follows federal rules on this exclusion, so the two-of-five-year residency requirement applies at the state level as well.

How Vermont's Capital Gains Exclusion Works for High-Income Earners

Vermont offers a 40% exclusion on qualifying capital gains, but the headline number is misleading for anyone at the FATFIRE level.

According to the Vermont Department of Taxes, the exclusion applies only to gains from assets held for more than three years. It does not apply to gains subject to the Vermont Land Gains Tax (covered in the next section). The exclusion is taken on the Vermont return after computing federal adjusted gross income, and it reduces Vermont taxable income rather than the gain itself.

The income phase-out is where high-net-worth investors typically lose the benefit entirely. The exclusion phases out dollar-for-dollar as federal adjusted gross income rises above $200,000 for single filers and $250,000 for married filers. For most people reading this, the exclusion is effectively zero on large gain events.

A practical example: a Vermont resident sells a business for a $4M gain. The gain has been held for four years, so it qualifies structurally. But if the seller's federal AGI including the gain exceeds $200,000 (which it will), the exclusion phases out completely before it provides any benefit. The full $4M gain is taxed at Vermont ordinary income rates.

The exclusion is more relevant for moderate-income earners realizing smaller gains from qualifying farm or business assets. For a FATFIRE investor with a substantial portfolio or a significant liquidity event, plan as if the exclusion does not exist and treat any benefit as a bonus rather than a baseline assumption.

For comparison, how other states structure capital gains taxes illustrates why Vermont's approach is particularly punishing at high income levels relative to neighboring states.

The Vermont Land Gains Tax: A Separate Levy Most Investors Miss

Vermont imposes a Land Gains Tax that is entirely separate from the ordinary income tax on capital gains. This is one of the most distinctive and underappreciated tax structures in the country, and it directly affects FATFIRE investors active in Vermont real estate development, land banking, or short-term property transactions.

According to the Vermont Department of Taxes, the Land Gains Tax applies to profits from the sale of land held for fewer than six years. The rates are punishing at the short end:

The critical point: the Land Gains Tax and the ordinary income capital gains tax can apply simultaneously to the same transaction. A land flip or short-term development exit could trigger both levies, producing a combined state tax burden that exceeds any other state in the country on that specific transaction type.

The Land Gains Tax applies to raw land. Improved property (land with structures) is generally subject to the ordinary income tax on capital gains rather than the Land Gains Tax, though the line between the two requires careful analysis when improvements are minimal or recent.

If you are evaluating a Vermont land acquisition with a development or resale horizon under six years, model the Land Gains Tax explicitly into your underwriting. The six-year hold threshold is a hard planning target.

How Non-Residents Are Taxed on Vermont Real Estate Sales

Vermont has clear jurisdiction over gains from Vermont-situated property, regardless of where the seller is domiciled. According to the Vermont Department of Taxes, non-residents who sell Vermont real property must file a Vermont nonresident income tax return (Form IN-111) and pay Vermont income tax on those gains.

The practical compliance issue that catches non-resident investors off guard is the withholding requirement. Vermont requires the buyer or closing agent to withhold 2.5% of the gross sale price (not the gain) at closing via Form RW-171. This withholding applies regardless of whether a gain is ultimately realized.

On a $3M Vermont vacation property sale, that is $75,000 withheld at closing, even if your actual Vermont tax liability is lower. You reclaim the excess by filing a nonresident return. The cash flow implication is real, particularly for transactions where the seller is deploying proceeds into a time-sensitive reinvestment.

For non-resident investors with Vermont rental properties or commercial holdings, Vermont-source income from those properties is also subject to Vermont income tax on an ongoing basis, not just at the point of sale.

Interstate real estate transactions create additional complexity when the seller's home state also claims jurisdiction over the gain. Most states provide a credit for taxes paid to other states, but the mechanics vary and the credit may not fully offset the Vermont liability depending on your domicile state's rates and rules.

Vacation home sales in Vermont follow the ordinary income tax treatment described above. The primary residence exclusion is not available for a property that does not meet the two-of-five-year use test, and Vermont conforms to the federal definition.

Vermont vs. Federal Capital Gains Tax: Side-by-Side at Key Income Levels

The gap between federal and Vermont treatment widens significantly as income rises. The table below shows approximate combined marginal rates for a Vermont resident in 2024, assuming long-term gains and the 3.8% NIIT applies above the relevant thresholds.

According to Tax Foundation data, this combined burden places Vermont among the higher capital gains tax states nationally for high-income earners.

The standard retail advice about long-term capital gains rates being "favorable" is written for people in the 15% federal bracket. At $500K+ income, the federal preferential rate is 20%, NIIT adds 3.8%, and Vermont adds up to 8.75% with no long-term preference. The combined 32.55% rate is the real number to plan around.

For investors holding concentrated positions, this math makes pre-liquidity planning critical. A $10M business sale at these combined rates produces roughly $3.25M in federal and state tax before any mitigation strategies. The same transaction with a well-structured charitable remainder trust or opportunity zone deployment could materially reduce that figure.

Tax Strategies for High-Net-Worth Vermont Investors Before a Major Sale

The combined Vermont and federal rate above 32% makes pre-sale structuring worth significant effort. These are the strategies with the most leverage at the FATFIRE level.

Charitable Remainder Trusts and Donor-Advised Funds

Contributing appreciated assets to a Donor-Advised Fund before a sale eliminates both federal and Vermont capital gains tax on the appreciation, while generating a charitable deduction in the year of contribution. For a Vermont resident with $2M in appreciated stock and genuine philanthropic intent, the combined tax savings on the appreciation can exceed $600,000 compared to an outright sale and separate donation.

A Charitable Remainder Trust allows the trust to sell the appreciated asset rather than the individual, deferring the gain over the trust's annuity payments. Given Vermont's high combined rate, the deferral value is substantial. The CRT structure requires careful design and is most effective when the donor is comfortable with the irrevocable nature and the annuity payout structure.

Qualified Opportunity Zones

Under IRC Section 1400Z-2, investing capital gains into a Qualified Opportunity Fund within 180 days of a sale defers federal recognition of the original gain until 2026, and gains on the QOF investment itself may be partially or fully excluded if held long enough. Vermont conforms to the federal QOZ framework for federal purposes, but investors should confirm current Vermont conformity for state-level deferral, as Vermont has not enacted a separate state-level QOZ incentive. The state tax deferral benefit may be limited compared to the federal benefit, requiring separate analysis.

Installment Sales

Structuring a business or real estate sale as an installment sale spreads the gain recognition over multiple years, potentially keeping annual Vermont taxable income below the top bracket threshold. This is most effective when the buyer can support the installment structure and the seller does not need full proceeds immediately.

Tax-Loss Harvesting

Vermont follows federal rules on offsetting capital gains with capital losses. Losses from securities in other states are fully usable against Vermont-source gains. A systematic approach to minimizing capital gains on stock sales across a large portfolio can meaningfully reduce Vermont taxable income in high-gain years.

Timing and Residency

For investors considering a change of domicile before a large liquidity event, Vermont's top rate of 8.75% creates a meaningful incentive to establish residency in a no-income-tax state before the gain is recognized. This requires genuine domicile change well in advance of the sale, not a nominal address change. Vermont and most states scrutinize domicile claims aggressively around large gain events.

Non-resident capital gains implications vary significantly by state, and the interaction between your domicile state and Vermont source income requires specific analysis.

Qualified Small Business Stock and Vermont Conformity

Under IRC Section 1202, taxpayers may exclude up to 100% of capital gains from the sale of qualified small business stock held for more than five years. For a founder or early investor in a qualifying C-corporation, this exclusion can eliminate federal capital gains tax entirely on gains up to $10M or 10 times the adjusted basis.

Vermont's conformity to Section 1202 is a critical planning question. Vermont does not automatically conform to all federal exclusions, and the state's treatment of QSBS gains should be confirmed with a Vermont tax attorney before structuring a business exit around this exclusion. If Vermont does not conform, the state-level tax on a large QSBS gain could be substantial even if the federal liability is zero.

For business owners in Vermont evaluating a sale, the QSBS analysis belongs in the pre-sale planning conversation alongside entity structure, holding period, and buyer type. The interaction between Vermont's ordinary income treatment and the federal QSBS exclusion can produce a situation where the federal bill is zero and the Vermont bill is 8.75% of the full gain.

ETF taxation strategies present a different set of considerations for investors managing liquid portfolios alongside illiquid business interests, particularly around wash sale rules and loss harvesting timing.

Reporting Vermont Capital Gains: Filing Requirements and Deadlines

Vermont capital gains are reported on Form IN-111, the Vermont Individual Income Tax return. The form incorporates information from your federal Schedule D and Form 8949, so the federal return must be complete before finalizing the Vermont return.

Non-residents selling Vermont real property file the same Form IN-111 as a nonresident return, in addition to the Form RW-171 withholding filed at closing.

Estimated tax payments are required if you expect to owe more than $500 in Vermont tax after withholdings and credits. The standard quarterly schedule applies: April 15, June 15, September 15, and January 15 of the following year. For investors with a large one-time gain event, a single-quarter estimated payment may be required to avoid underpayment penalties.

Vermont's late filing penalty is 5% per month, up to 25% of unpaid tax. The late payment penalty is 1% per month, also up to 25%. Interest accrues on unpaid balances. For a $500,000 Vermont tax liability, a six-month filing delay could add $75,000 or more in penalties and interest before the underlying tax is paid.

If you are selling Vermont farmland, the farmland capital gains calculations involve additional basis and depreciation recapture considerations that interact with both the ordinary income tax and the potential Land Gains Tax analysis.

For investors with non-primary residence property sales in Vermont, there is no state-level equivalent of the federal primary residence exclusion for second homes. The full gain is taxable as ordinary income at Vermont rates.

Recent Changes and the Legislative Outlook for Vermont Capital Gains Tax

Vermont's capital gains tax structure has shifted over the past decade. The state previously offered a percentage-based exclusion that provided more benefit to high-income earners with large gains. Legislative changes converted this to a flat dollar amount and then to the current 40% exclusion with income phase-outs, which effectively targeted the benefit toward moderate-income taxpayers.

The direction of Vermont's tax policy has generally moved toward higher rates and narrower exclusions for high-income earners, consistent with the state's fiscal priorities. Proposals in recent legislative sessions have included creating a separate lower rate for long-term gains (similar to the federal model) and expanding the exclusion for certain business and agricultural assets.

The federal policy environment also matters. Any increase in the federal long-term capital gains rate or changes to the NIIT threshold would affect Vermont residents' combined burden without any Vermont legislative action. Investors with large unrealized gains should monitor both state and federal developments and maintain flexibility in their timing decisions.

Vermont's conformity to federal provisions is not automatic. Each legislative session can produce selective conformity decisions that create divergence between federal and state treatment. The QSBS and QOZ issues described above are examples of areas where Vermont's conformity status requires active monitoring.

For investors with holdings across multiple states, understanding out-of-state capital gains taxation and tenants in common ownership structures adds additional layers that interact with Vermont's rules on multi-owner property dispositions.

References

• Vermont Department of Taxes -- "Vermont Income Tax: Capital Gains" (2024)
• Vermont Department of Taxes -- "Vermont Land Gains Tax" (2024)
• Vermont Department of Taxes -- "Nonresident and Part-Year Resident Income Tax Instructions (Form IN-111)" (2023)
• Vermont Legislature -- "32 V.S.A. § 5811 – Vermont Statutes, Title 32: Taxation and Finance"
• Internal Revenue Service -- "Publication 544: Sales and Other Dispositions of Assets" (2023)
• Internal Revenue Service -- "Publication 523: Selling Your Home" (2023)
• Internal Revenue Service -- "IRC Section 1202: Partial Exclusion for Gain from Certain Small Business Stock"
• Internal Revenue Service -- "IRC Section 1400Z-2: Opportunity Zones – Deferral of Gain"
• Tax Foundation -- "State Individual Income Tax Rates and Brackets" (2024)
• Tax Foundation -- "How High Are Capital Gains Tax Rates in Your State?" (2024)