When you sell capital assets, such as property and stocks, for more than you paid for them, you earn capital gains. Federal, state and local governments also tax these gains though they aren't earned income. On your federal taxes, the way capital gains are taxed depends on whether they are short-term or long-term capital gains. In Colorado, capital gains become even more complicated depending on whether they came from a Colorado source or not.
Colorado Source Capital Gain Subtraction
Qualified Colorado taxpayers may be able to subtract some capital gains from their income if those gains were earned from Colorado sources and included as part of their federal taxable income. A qualifying taxpayer is a person, company, estate or combination that has no overdue state taxes and not in default on any contractual obligations to the state or local governments. A qualifying taxpayer does not need to be a Colorado resident to claim the deduction.
You must have net capital gains from the sale of either property that is located in Colorado at the time of the sale or stocks or ownership interest in a Colorado business. The assets need to have been acquired on or after May 9, 1994, and the taxpayer must have owned the asset for at least five uninterrupted years prior to the sale.
During years that Colorado has a sufficient budget surplus, the state government may expand the definition what assets qualify for the Colorado Source Capital Gain Subtraction. Expansions could include allowing assets acquired before May 9, 1994, or allowing assets to be held for only a year before they qualify for the deduction.
You will need to fill out Colorado tax form DR 1316 Colorado Source Capital Gain Affidavit to verify that the capital gains you are not including in your income qualify for the deduction from your Colorado taxes. The form also allows you to calculate how much that deduction is. Make sure you include enough information in the description so that someone reading it would be able to see that it qualifies for the deduction. Otherwise, your refund could be delayed if the Department of Revenue needs to get more information.
- Free Advice: Income Tax Law
- Colorado Department of Revenue: Income Tax - Colorado Source Capital Gain Subtraction
- Colorado Department of Revenue: Who can claim the Colorado Source Capital Gain Subtraction?
- Colorado Department of Revenue: Common Filing Errors on Income Tax Returns
- Colorado Department of Revenue: Colorado Source Capital Gain Affidavit