Capital Gains Tax Repeal 2025: Latest State to Eliminate + 2026 Predictions
Two states just rewrote the rules on capital gains taxation, and the ripple effects could reshape your investment strategy for years to come. In 2025, Missouri and Texas both took unprecedented steps to eliminate state capital gains taxes, but they did it in remarkably different ways. Missouri became the first state with an individual income tax to completely exempt investment profits from state taxation, while Texas voters approved a constitutional amendment banning capital gains taxes forever, including on unrealized gains.
Photo by Chris Liverani on Unsplash
Meanwhile, Washington state moved in the opposite direction, adding a 2.9% surcharge to its existing 7% capital gains excise tax. The state has now collected over $1 billion in just three years, contradicting predictions of "wealth flight."
For investors, business owners, and real estate professionals, understanding these shifts isn't just interesting, it's financially essential. The difference between selling a $10 million business in California versus Missouri could mean $1.3 million more in your pocket.
Let's break down exactly what happened in 2025, why it matters, and which states might follow in 2026.
Missouri Makes History: First State to Eliminate Capital Gains Tax While Keeping Income Tax
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On July 10, 2025, Missouri Governor Mike Kehoe signed House Bill 594 into law, creating the most significant capital gains tax repeal in modern state history. Effective January 1, 2025, Missouri residents pay zero state tax on capital gains from stocks, bonds, real estate, cryptocurrency, and any other capital assets.
Missouri became the first state with an individual income tax to completely exempt capital gains. States like Florida and Texas have no capital gains taxes, but they also have no state income tax at all. Missouri created a hybrid: wage earners still pay income tax, but investors and business owners selling appreciated assets pay nothing to the state.
Missouri's capital gains tax repeal covers:
- Stocks, bonds, and mutual funds (all holding periods)
- Real estate including primary residences, investment properties, and land
- Business sales and ownership transfers
- Cryptocurrency and digital assets
- Any capital asset generating federal taxable gains
The exemption applies to both short term and long term capital gains with no income limits, no caps, and no asset type restrictions. Missouri residents simply deduct 100% of all capital gains reported federally when calculating Missouri adjusted gross income.
For corporations, Missouri included a trigger: when the state's top individual income tax rate falls to 4.5% or lower, corporations can also deduct 100% of capital gains. With the current rate at 4.7%, this could happen as soon as 2026.
Governor Kehoe called the change "pro-growth," keeping "more money in the hands of Missouri families and less in government coffers." The capital gains tax repeal costs Missouri approximately $350 million annually.
Important: Missouri's repeal applies only at the state level. Residents still owe federal capital gains taxes (0% to 20% depending on income) plus potential 3.8% Net Investment Income Tax. But eliminating 4.7% to 5.3% in state taxes represents substantial savings.
Texas Goes Constitutional: Banning Capital Gains Taxes Forever
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Just months after Missouri's legislation, Texas voters took an even more dramatic step. On November 4, 2025, approximately 65% of Texas voters approved Proposition 2, a constitutional amendment permanently prohibiting state capital gains taxes.
But Texas already has no income tax. Why ban a tax that's never existed?
The Washington State Warning
Washington has no traditional income tax but enacted a 7% capital gains excise tax in 2022 on gains exceeding $250,000 annually. When voters had a chance to repeal it in November 2024 through Initiative 2109, over 63% voted to keep it. This proved that even no income tax states can impose targeted capital gains taxation.
What Are Unrealized Gains?
Texas's amendment breaks new ground by prohibiting taxes on both realized and unrealized gains. An unrealized gain occurs when an asset increases in value but you haven't sold it yet. For example, if you bought stock for $100,000 now worth $500,000, you have $400,000 in unrealized gains.
Under current U.S. tax law, you owe zero taxes until you sell. The Biden administration proposed taxing unrealized gains for ultra wealthy individuals (those with $100 million+ in assets) at 25%. While these proposals didn't become law, they concerned many taxpayers and business owners.
Texas's constitutional ban provides long term certainty that policy won't change regardless of future political shifts, sending an unmistakable signal to investors and businesses.
Washington State: The Opposite Approach With Surprising Results
While Missouri and Texas eliminated capital gains taxes, Washington doubled down on theirs, with results that challenge conventional wisdom about state capital gains taxation.
Washington enacted its 7% capital gains excise tax in 2022 on long term gains above $270,000 annually. In 2025, Washington added a 2.9% surcharge on gains exceeding $1 million above the exemption, creating a combined 9.9% rate on the highest earners.
The Revenue Reality:
- Year 1 (2023): Generated $840 million, well above projections
- Year 2 (2024): $418 million, attributed to market volatility not wealth flight
- Three Year Total: Over $1 billion funding K-12 education and school construction
When Washington voters could repeal the tax via Initiative 2109 in November 2024, over 63% voted to keep it. The tax's popularity stems from revenue dedicated to education programs and narrow application to high earners.
Washington's experience proves not all states are eliminating capital gains taxes. The contrast between Washington (adding taxes), Missouri (eliminating them), and Texas (constitutionally banning them) highlights increasingly divergent state tax policies.
The State Capital Gains Tax Landscape
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Eight states have no capital gains tax (no state income tax):
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Wyoming, and New Hampshire
Missouri is now the only state maintaining income tax on wages while completely exempting capital gains.
The gap between states is staggering. A business owner selling a company for $10 million faces:
- California: $1.33 million in state taxes (13.3% top rate)
- New York: $1.09 million (10.9% including NYC)
- New Jersey: $1.08 million (10.75% top rate)
- Missouri, Texas, Florida: $0 in state taxes
For high value transactions, your state can determine whether you retire comfortably or extraordinarily wealthy. Understanding state-by-state differences is critical.
2026 Predictions: States Most Likely to Follow
While no state has announced definitive capital gains tax repeal plans for 2026, several bear watching based on their tax policy trajectories.
Oklahoma: Income Tax Elimination Path
Oklahoma Governor Kevin Stitt repeatedly calls for eliminating the state's income tax. In 2026, Oklahoma's flat rate falls from 4% to 3.5%, reducing revenue by $700 million. Full income tax elimination would automatically eliminate capital gains taxes.
Oklahoma already offers 100% deduction for capital gains from Oklahoma property held five+ years or Oklahoma company stock held two+ years, showing legislative appetite for these preferences.
States With Partial Exemptions That Might Expand
Arkansas exempts 50% of capital gains plus 100% of gains exceeding $10 million. Expanding to full exemption would mirror Missouri.
Arizona offers effective 1.875% capital gains rate through a 25% subtraction. Increasing to 100% would align with Missouri's approach.
Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin all tax long term capital gains below ordinary income rates and could expand preferences incrementally.
Border State Competitive Pressure
Missouri borders eight states, only one (Tennessee) with no income tax. Others face pressure as Missouri residents realize capital gains tax free.
Iowa moved to 3.8% flat tax. Governor Reynolds previously aimed to eliminate income tax, though 2026 priorities shifted to property tax relief.
Illinois faces acute pressure with 4.95% flat rate and chronic budget problems, losing high earners to Florida, Texas, and now Missouri.
Strategic Planning: How to Respond
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Missouri's capital gains tax repeal and Texas's constitutional protection create immediate tax planning opportunities.
Residency Timing for Business Sales
Establishing Missouri or Texas residency before selling a business could save hundreds of thousands or millions. However, residency changes require careful planning:
- Establish physical presence (more days in new state than old)
- Change driver's license, voter registration, professional licenses
- Move bank accounts, establish new service providers
- Demonstrate genuine permanent residency intent
Most tax advisors recommend establishing residency 6 to 12 months before major transactions. For deals over $5 million, consider 18 to 24 months advance planning.
States aggressively audit residency claims. Work with experienced tax counsel and maintain meticulous documentation.
Real Estate and Investment Strategy
Missouri's repeal transforms investment property economics. Properties with substantial appreciation can be sold without state tax consequences, creating opportunities to rebalance portfolios, exit underperforming properties, or implement succession planning.
For stock portfolios, investors can realize gains in Missouri without state tax friction, enabling rebalancing, gain harvesting, or funding lifestyle expenses more efficiently.
Multi State Complications
Business owners with multi state operations or investors with properties in multiple jurisdictions face complexity. Multi state businesses may trigger capital gains taxes in other states based on apportionment formulas. Real estate outside Missouri remains subject to that state's taxes.
Working with tax professionals who understand multi state taxation is critical.
Why Professional Tax Planning Matters
State tax policy is evolving faster than any time in recent decades. Missouri's capital gains tax repeal, Texas's constitutional ban, and Washington's surcharge represent fundamentally different approaches happening simultaneously.
Timing is everything. Selling before or after establishing favorable residency can mean hundreds of thousands in difference.
Compliance is unforgiving. States employ sophisticated audit techniques and aggressively challenge residency claims for high dollar transactions.
Planning is personal. Tax savings matter, but quality of life, business environment, proximity to family, and cultural fit all influence major decisions.
Take Control of Your Capital Gains Tax Strategy
At IRSProb.com, our tax professionals specialize in helping clients navigate complex state and federal tax issues, including:
Strategic Tax Planning: We analyze your situation to identify capital gains tax minimization opportunities through timing, residency planning, and transaction structuring that maximizes after tax proceeds while maintaining full compliance.
Capital Gains Tax Minimization: We evaluate comprehensive federal and state optimization strategies including timing, loss harvesting, installment sales, charitable techniques, and transaction structuring.
Investment Property Guidance: We provide specialized counsel for real estate investors navigating property sales, 1031 exchanges, opportunity zones, and multi state portfolios affected by varying state treatments.
Our tax professionals stay current on rapidly evolving state tax policies and understand how to position clients to benefit from favorable developments while protecting against aggressive enforcement.
When hundreds of thousands or millions are at stake, strategic tax planning isn't an expense, it's one of your highest return investments.
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