Updated October 4, 2026. Quick answer: Yes. Kentucky taxes a capital gain as income at its flat rate, and the printed instructions give no separate rate for gains. For 2025 the rate is 4%, and the 2025 act says “the tax shall be three and one-half percent (3.5%) of net income” for taxable years beginning on or after January 1, 2026.
Selling your home? How the state taxes the profit, from its own tax documents: Does Kentucky tax the profit from selling your home?.
The same question for dividends and interest: does Kentucky tax dividends and interest.
How Kentucky treats capital gains
| Item | What the documents say |
|---|---|
| Treatment | Taxed as income at the flat rate; no separate rate for gains printed |
| Rate for 2025 | 4% (Form 740 instructions: “For 2025, the tax rate for individual income tax is 4%.”) |
| Rate for 2026 and after | 3.5% for taxable years beginning on or after January 1, 2026 (2025 Ky. Acts ch. 1) |
| Narrow items | Capital gains on sale of Kentucky turnpike bonds and on property taken by eminent domain are exempt for Kentucky purposes |
A $50,000 long-term gain
For a gain realized in 2026, the Kentucky tax is computed as $50,000 x 3.5% = $1,750.
For a gain realized in 2025 it is computed as $50,000 x 4% = $2,000.
What changes in 2026
The 2026 rate falls from 4% to 3.5% for taxable years beginning on or after January 1, 2026.
Federal rules
The state’s treatment sits on top of the federal one. The IRS explains the federal tax on gains in Topic no. 409, Capital Gains and Losses and Publication 550, Investment Income and Expenses.
Related: whether Kentucky taxes pensions, how Kentucky taxes retirement income, the capital gains tax by state table, and the federal capital gains tax calculator.
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Answer againSources
- 2025 Kentucky Individual Income Tax Forms (Form 740 instructions packet): https://revenue.ky.gov/Forms/740%20Packet%20Instructions.pdf
- Individual Income Tax: https://revenue.ky.gov/Individual/Individual-Income-Tax/Pages/default.aspx
- 2025 Kentucky Acts Chapter 1 (HB 1), An Act relating to the individual income tax rate: https://apps.legislature.ky.gov/law/acts/25RS/documents/0001.pdf
Sources: the primary documents linked above, read on October 4, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.