Alabama has no separate capital gains tax and no lower rate for long-term gains that we could find. A gain from stocks, a business or real estate goes on Schedule D of the Alabama return and is taxed with the rest of your income on the graduated 2%, 4% and 5% schedule. Because the 5% bracket starts at only $3,000 of taxable income for a single filer and $6,000 for a joint return, almost every sizable gain is taxed at 5% at the margin. What softens it is the federal income tax deduction, which Alabama allows and which includes the federal tax your gain created.
This guide uses the Alabama Department of Revenue's individual income tax page, its 2025 Form 40 and Form 40NR booklets (the latest filing booklets we read) and two IRS pages, all read on 3 November 2026. We did not read the Code of Alabama itself, so every rule is stated as the Department states it. No Alabama rate change for 2026 appeared on the Department's page, but check it before a large sale.
The Department's individual income tax page says Alabama has a graduated individual income tax, with rates ranging from 2% to 5% depending on taxable income and filing status. For single, head of family and married filing separate returns the rates are 2% on the first $500 of taxable income, 4% on the next $2,500 and 5% on all taxable income over $3,000. For married persons filing a joint return they are 2% on the first $1,000, 4% on the next $5,000 and 5% on all taxable income over $6,000.
The page does not describe a separate schedule for capital gains, and the booklet instructions we read apply the same rates to a gain once it is part of taxable income. Alabama taxes residents on income from every source: the Department says individuals domiciled in Alabama are subject to tax on their entire income whether earned within or without Alabama. The return is due on the same date as the federal return, April 15 for most individuals.
The 2025 Form 40 booklet says that if you sold real estate, stocks, bonds or other capital assets you use Schedule D to report the net gain or loss, and that mutual fund or brokerage statements reporting capital or ordinary gains must be included on Schedule D too. The Schedule D instructions give the core rule: under Alabama law the entire gain is taxable, and the entire loss is deductible in the year in which it occurs.
That wording differs from the federal system. IRS Topic 409 says the federal rule is that an excess capital loss lowers your income by no more than $3,000 ($1,500 if married filing separately), and that a lower federal rate may apply to a net capital gain. The Alabama booklet instructions we read contain no matching limit or holding-period rule, but we did not read the statute, so confirm with the Department before relying on a large loss.
Alabama lets you deduct federal income tax. The booklet says to use your federal return and the worksheet on page 31 to determine the federal income tax deduction, which goes on Form 40, line 12. The worksheet starts with the tax shown on line 22 of Form 1040, so the federal tax caused by a large gain is part of the figure. Our reading is that this offsets part of the Alabama tax on the gain, but the Department does not describe it that way, and the worksheet has further steps (certain refundable credits are subtracted). Use the official worksheet for your own figure.
The table is our arithmetic, not an official calculation: the added Alabama tax when a gain sits on top of income that already puts you in the 5% bracket, ignoring the federal income tax deduction, exemptions and credits.
| Capital gain in taxable income | Added Alabama tax at 5% |
|---|---|
| $10,000 | $500 |
| $50,000 | $2,500 |
| $100,000 | $5,000 |
| $500,000 | $25,000 |
Example 1 (ours, bracket effect): a single filer with $2,000 of other taxable income owes $70 (2% on $500 is $10, 4% on $1,500 is $60). Adding a $10,000 gain makes taxable income $12,000 and the tax $560 (the same $10 and $100 on the first $3,000, plus 5% on $9,000, which is $450), so the gain adds $490, an average of 4.9% on the gain because part of it fills the lower brackets.
Example 2 (ours, with an assumed federal figure): a $50,000 gain taxed at 5% adds $2,500 of Alabama tax before the deduction. If we assume, purely for illustration, that the gain raised the federal income tax shown on the Alabama deduction worksheet by $7,500, the extra federal deduction lowers Alabama taxable income by $7,500 and Alabama tax by $375, so the net added Alabama tax is $2,125. The $7,500 is an assumption, not a federal rate or a Department figure.
These examples use the rate schedule above applied directly; the Department's printed tax table, standard deduction chart and exemptions can move a real return by a few dollars either way.
The booklet says that if you sold your personal residence, any gain realized is taxable to the same extent as reported on your federal return, and that a loss on the sale of a personal residence is not deductible. As we read it, a gain that your federal return excludes is not taxed by Alabama, but the Department does not spell that out. IRS Topic 701 says you may qualify to exclude up to $250,000 of the gain from your income, or up to $500,000 if you file a joint return with your spouse. Read that topic for the ownership and use tests, which we do not repeat here.
Bullion: the booklet lists, among income you do not report, any net capital gain on the exchange of precious metal bullion beginning January 1, 2025, and defines bullion as coins, bars or rounds containing primarily refined gold, silver, platinum or palladium that is marked and valued primarily by its weight, purity and content.
Installment sales: the booklet says income from an installment sale is reported in accordance with Internal Revenue Code Section 453 with the exception of 453(i), and that sales of stock, securities and other property traded on established markets can no longer be reported on the installment method for sales made after 1987.
Inherited property: the booklet says the basis of property transmitted at death is the fair and reasonable market value at the time of the decedent's death, which affects the gain when an heir sells. Read the booklet's full text before relying on this summary.
A part-year resident reports on Form 40 all sales made during the period of residence. If you sell property located in Alabama after you cease to be a resident, the Department says to report the sale on Form 40NR.
For nonresidents, the Form 40NR booklet says the gain or profit from any sale, exchange or other disposition by a nonresident of real or tangible property located in Alabama is taxable even though it is not connected with a business carried on in the state. A gain on property located outside Alabama is not taxable to a nonresident, but it must be included in total income to compute the ratio of Alabama income to total income. The gain of a nonresident from intangible personal property such as stocks, bonds and other securities is ordinarily not taxable, except to the extent the property has acquired a business legal jurisdiction in Alabama. The nonresident's federal income tax deduction is prorated by the percentage of income earned in Alabama to total income from all sources.