South Carolina Tax on Capital Gains

South Carolina does not impose a separate capital gains tax. Instead, capital gains are taxed as ordinary income under the state’s income tax system.

However, the state offers one of the most generous tax breaks in the country for long-term capital gains, which can significantly reduce the amount of tax you owe.

For taxpayers who hold assets for more than one year, South Carolina allows a 44% deduction of net long-term capital gains. This deduction dramatically lowers the portion of the gain that is subject to state income tax.

The state’s top marginal income tax rate is about 6.2%, but because of the deduction, the effective tax rate on long-term gains is much lower.

How South Carolina Taxes Capital Gains

1. Calculate Your Net Capital Gain

Start by determining your net capital gain:

• Add up all long-term capital gains
• Subtract any capital losses

This calculation generally follows federal rules, so the capital gain reported on your federal return flows through to your South Carolina return.

2. Apply the 44% Long-Term Capital Gains Deduction

If the gain qualifies as long-term (asset held for more than one year):

• 44% of the net gain is deducted
• Only 56% of the gain is taxable

This deduction is the key feature that makes South Carolina especially attractive for long-term investors.

3. Tax the Remaining Gain as Income

The remaining 56% of the gain is added to your other income, such as wages, pensions, or interest, and taxed using South Carolina’s progressive income tax brackets, which currently top out at approximately 6.2%.

Because less than two-thirds of the gain is taxed, the effective state tax rate on long-term capital gains is substantially lower than the headline rate.

4. Short-Term Capital Gains

Capital gains on assets held for one year or less do not qualify for the 44% deduction.

• Short-term gains are fully taxable
• They are added to income and taxed at your full South Carolina income tax rate

This makes holding assets long term far more tax-efficient at the state level.

Example

• Long-term capital gain: $10,000
• 44% deduction: $4,400
• Taxable gain: $5,600

That $5,600 is added to your other income and taxed at your regular South Carolina income tax rate—not the full $10,000.

Primary Residence Sales

South Carolina generally follows federal home sale exclusion rules:

• Up to $250,000 of gain excluded for single filers
• Up to $500,000 for married couples filing jointly

Only gains above those federal limits flow through to the South Carolina return, where the 44% deduction may then apply if the gain qualifies as long-term.

Key Points to Remember

• South Carolina taxes capital gains as ordinary income
• There is no separate capital gains tax rate
• A 44% deduction applies to long-term capital gains
• Only 56% of long-term gains are taxed
• Short-term gains receive no deduction
• Federal home sale exclusions still apply

In short, South Carolina strongly favors long-term investing by sharply reducing the taxable portion of long-term capital gains.

Recommendation: File Electronically

Because South Carolina’s capital gains rules involve special deductions and coordination with your federal return, electronic filing is strongly recommended.

E-filing helps:

• Automatically calculate and apply the 44% deduction
• Correctly distinguish between short-term and long-term gains
• Reduce math and reporting errors
• Speed up processing and refunds
• Ensure consistency between federal and state returns

Electronic filing is especially helpful for taxpayers reporting investment income, real estate sales, or large asset transactions.