Pennsylvania does not follow the federal split between short-term and long-term gains. Its Department of Revenue says the state makes no provision for capital gains, so every gain from selling property is taxed at the same flat rate as the rest of a resident's taxable income, and the way losses are handled is stricter than on the federal return.
This guide covers the rate, how a gain is reported, the loss rules that surprise investors, the home sale exemption, nonresidents, and the local earned income tax. It uses Pennsylvania Department of Revenue guidance and forms, the Department of Community and Economic Development's local return form and the Local Tax Enabling Act, all read on 3 November 2026.
The 2025 PA-40 instructions give the state income tax rate for 2025 as 3.07 percent. The Department's 2026 estimated tax instructions use the same 3.07 percent figure, so we found no change for 2026. The Department's tax rates page was also read on 3 November 2026; it is the place to check whether the rate has moved when you file.
The PIT Guide says gains from the sale, exchange or other disposition of any kind of property are taxable, and that Pennsylvania makes no provision for capital gains and has no provisions for long-term and short-term gains. Pennsylvania taxes eight classes of income, and a gain on property is one of them: the class called net gains or income from the dispositions of property, reported on PA Schedule D. There is no standard deduction, personal exemption or itemized deduction to reduce it.
Gain is the amount realised less adjusted basis. The guide says adjusted basis ordinarily matches the federal figure, but that basis in business property and in partnership and S corporation investments is often different, and the Schedule D itself warns that amounts from the federal Schedule D may not be correct for Pennsylvania. Use the Pennsylvania figures, not a copy of the federal form.
| Net gain on Schedule D | Pennsylvania tax at 3.07% (our arithmetic) |
|---|---|
| $10,000 | $307.00 |
| $50,000 | $1,535.00 |
| $100,000 | $3,070.00 |
| $500,000 | $15,350.00 |
The table is our arithmetic (gain times 3.07 percent, the 2025 rate), not an official calculation. It ignores credits for tax paid to another state and any other items on your return.
This is where Pennsylvania differs most from the federal system. The PIT Guide says Pennsylvania has no provision for carrying losses from one tax year to another, and does not allow an offset of loss against gain from one class of income to another or between two taxpayers, such as spouses. The PA-40 instructions repeat that you cannot carry forward or carry back gains or losses to other tax years, and that spouses, whether filing jointly or separately, may not use each other's expenses to reduce income or offset each other's income and losses.
A loss is also recognised only when it comes from a transaction entered into for profit, such as investments, business property and real estate. The guide says losses are not recognised on property not acquired as an investment or for profit, such as personal use property, and Schedule D tells filers that a loss on the sale of personal property cannot be reported. Schedule D adds that a taxpayer and spouse must complete separate schedules unless all the gains and losses were realised on a joint basis.
Within Schedule D, the instructions say gains and losses on the sales listed in the line 3 section may be offset if they are for the same taxpayer. Our four illustrations show the effect, at the 2025 rate:
| Our illustration (2025 rate) | Gain | Loss | Amount taxed | Pennsylvania tax | Result |
|---|---|---|---|---|---|
| A. $40,000 gain and $15,000 loss on two investment sales by the same person, both on Schedule D | $40,000 | $15,000 | $25,000 | $767.50 | Net $25,000 taxed |
| B. $40,000 gain on Schedule D and a $15,000 loss from a business (a different class of income) | $40,000 | $15,000 | $40,000 | $1,228.00 | Loss cannot reduce the gain |
| C. $40,000 gain for one spouse and a $15,000 investment loss for the other spouse | $40,000 | $15,000 | $40,000 | $1,228.00 | Spouse's loss cannot be used |
| D. $30,000 gain in year one, then a $30,000 loss in year two | $30,000 | $30,000 | Year one $30,000; year two $0 | $921.00 in year one, $0.00 in year two | No carryover or carryback, so the loss earns no refund |
The scenarios are our own and use round numbers; check how your particular assets are classified in the guide's classification table before relying on them.
The PIT Guide says the gain on the sale of a principal residence occurring on or after 1 January 1998 is generally exempt from Pennsylvania personal income tax. To qualify, the sale must meet all of these conditions as the Department states them: it was sold on or after 1 January 1998, it was owned for two of the last five years before the sale, and it was physically occupied and personally used the most during two of the last five years. If you sold a principal residence and claimed the exemption within two years of the sale of a second principal residence, the second sale must be reported unless the sale results from a change in personal circumstances beyond your control, such as a change in employment or health.
No loss may be taken on the sale of a principal residence, because the transaction is not entered into for profit. For an exempt sale there is no requirement to file any schedule for informational purposes. If part of the property is used for business or rental, the exemption does not apply to that portion, and the gain or loss on the part not eligible goes on PA Schedule D (the Department also directs filers to PA Schedule 19 for the worksheet where part of the gain is taxable). We read only the Pennsylvania sources here, so do not assume a federal calculation tells you the Pennsylvania result. For the federal side, see our home sale capital gains guide.
Residents must report all gains and losses on the sale, exchange or disposition of property regardless of where the disposition occurred. The Department's overview says a resident is allowed a credit for income taxes imposed by and paid to other states on income that is subject to Pennsylvania tax, claimed on Schedule G-L.
Nonresidents are taxed only on Pennsylvania-source income. In practice the guide says that only transactions with net gains and losses on tangible property located within Pennsylvania must be reported on Schedule D, and gives as examples sales of rental property located in Pennsylvania, sales of business or rental tangible personal property located in Pennsylvania, and sales of land and buildings located in Pennsylvania held as investment property. The Department's overview adds that nonresidents are not subject to Pennsylvania tax on gains realised on the sale, exchange or disposition of intangible property derived from Pennsylvania sources, and that losses on intangible property may not be used to offset any taxable gains. That is why a nonresident's stock gain generally is not a Pennsylvania matter while a sale of a Pennsylvania rental house is.
We did not find a separate Department rule for part-year residents in the pages we read, so we say nothing about how a gain is split between the resident and nonresident parts of a year; ask the Department or a preparer if you moved in or out of Pennsylvania in the year of a sale.
The local earned income tax collected under the Local Tax Enabling Act has a narrower base than the state tax. The Department of Community and Economic Development's annual local earned income tax return lists capital gains among the non-taxable income and tells filers not to include interest, dividends or capital gains in the line for other taxable earned income. The Local Tax Enabling Act's definition of net profits does not include income which is not paid for services provided and which is in the nature of earnings from an investment. So the 3.07 percent state tax is the only income tax on an ordinary investment gain for most filers.
Two limits: this covers the local earned income tax collected under that Act. We did not review Philadelphia's own city taxes, and we did not review how a gain inside an operating business is treated for local net profits, so check with your local tax collector in that case. Our local earned income tax guide covers the tax itself.
We found no change to the Pennsylvania rate or to the net gains rules for 2026. The 2025 PA-40 instructions state 3.07 percent for 2025, and the 2026 estimated tax instructions use 3.07 percent as well. The 2025 Schedule D has a digital asset question on it, so sales of digital assets are asked about on the schedule. We did not find an official notice of a pending rate change.
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