Missouri eliminates capital gains tax

Executive summary

On July 10, 2025, Missouri Gov. Mike Kehoe signed House Bill 594, eliminating the capital gains tax for individuals and providing a path to eliminate the tax for corporations. The bill overwhelming passed both state chambers. Missouri is the first state imposing an individual income tax to eliminate a tax on capital gains.

The new law provides that, effective Jan. 1, 2025, 100% of all income reported as a capital gain for federal income tax purposes by an individual shall be subtracted from federal adjusted gross income for purposes of determining Missouri taxable income.

In addition, beginning on or after Jan. 1 of the tax year following the year in which the top individual income tax rate is 4.5% or lower, corporations may subtract 100% of income reported as capital gains for federal income tax purposes. For 2025, the top individual income tax rate is 4.7%. Corporations will not be eligible for the capital gains subtraction in 2026.

Takeaways

With enactment of House Bill 594, Missouri becomes the first state to completely exempt capital gains from its individual income tax. Most states tax capital gains as ordinary income.

Taxpayers with significant or mostly capital gain income will have a significantly reduced tax burden. Corporate taxpayers should monitor developments with respect to individual income tax rates. If the individual income tax rate falls to 4.5% or lower, corporations will also be able to subtract 100% of the income reported as capital gains. However, based on current revenue estimates, it may be several years before the state’s existing individual income tax rate reduction triggers result in a tax rate of 4.5%.

There are wide variations in the way states tax capital gains. Many states such as Minnesota and California tax capital gains as ordinary income, while other states impose a special rate for capital gains, such as Connecticut or Hawaii. A few states provide exemptions and exclusions for certain types of individual or business capital gains. However, no state imposing an individual income tax has gone so far as to eliminate a tax on capital gains.

Individual income tax rate cuts have become popular targets for state legislatures as over three dozen cuts have been enacted in over half the states since 2021. The accessibility of remote workforces and uniquely dynamic economic conditions have created a more competitive environment for state workers. But rate cuts, even in the face of increased overall tax collections, often come with projected revenue reductions. The fiscal note for House Bill 594 estimates reductions to revenue of over $185 million in fiscal year 2026 and over $261 million by fiscal year 2031. However, those figures are estimates and some opponents have suggested much higher costs to annual revenue.

Taxpayers with questions about individual income tax and related planning should reach out to their state tax or private company tax adviser for more information.