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Investment income

In 2025, the Washington legislature passed Engrossed Substitute House Bill (ESHB) 2081, which amended the business and occupation (B&O) tax deduction for certain investments, including incidental investment income and investment income for qualified person(s). This legislation took effect January Jan. 1, 2026. 

Also in 2025, the legislature instructed the Department of Revenue (via Engrossed Substitute Senate Bill (ESSB) 5167) to implement a temporary expanded Voluntary Disclosure Program for entities engaged in investment activities. For more information, including FAQs about this program, see our Investment Income Voluntary Disclosure Program webpage. 

This page provides basic information on investment income. We will publish a Special Notice, Frequently Asked Questions, Interim Guidance Statements (IGS), Excise Tax Advisories, and Rulemaking on this page when they become available.

Steps we’re taking

We are devoting significant resources to developing and publishing guidance. 

Current plans include: 

  • Multiple interim guidance statements (IGSs). 
    • Our goal is to begin publishing IGSs over the next several months. 
  • Multiple updates to existing web content. 
    • Web content updates will be released on a case-by-case basis as the department makes final policy determinations. 
  • Drafting a new rule (within chapter 458-20 WAC), addressing investment income from personal (individual) investments, as well as investment income received by persons making investments through collective investment vehicles. 

Your voice matters

We welcome your input, including areas where you believe guidance may be needed. Your questions and feedback will help us update guidance more frequently.

You can submit questions and comments to Rulings@dor.wa.gov. We will answer your questions as quickly as possible. However, it may take us longer than our standard 10 days. You do not have to tell us who you are if you are merely providing comments or feedback and would like general information.

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Topics

The department is developing guidance on specific issues related to the B&O tax and investment activities. 

We expect to add more topics over time and will update this page regularly. Please use this page as your main source for guidance on the taxability of investments.

Investment income

“Gross income of the business” includes gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest income, dividends, and other investment-related income without any deduction for losses (RCW 82.04.080). “Investments” include, but are not limited to: 

  • Bonds, debentures, and other evidences of indebtedness 
  • Certificates of deposit or other deposit accounts 
  • Certificates of interest or subscription, and collateral trust certificates 
  • Commodities 
  • Derivative instruments 
  • Equities 
  • Federal funds 
  • Fixed income instruments 
  • Foreign currency transactions 
  • Futures contracts, forward contracts, and notional principal contracts such as swaps 
  • Money market funds 
  • Money provided to a venture as capital with the expectation of financial benefit to the investor, particularly where the investor does not exercise control or make managerial decisions for the venture 
  • Mutual funds 
  • Options, such as calls and puts 
  • Profit-sharing agreements 
  • Securities, such as stocks (publicly traded or privately-held), including securities purchased and sold under resell or repurchase agreements 
  • Trading account activities and assets 
  • Voting-trust certificates 

Deductible investment income

Generally, the following are deductible: 

  • Incidental investment income, which is income from investments that equals less than 5% of the person’s total worldwide gross income annually. See our Investments tax topic article for more information specific to the incidental investment income deduction. 
    • Note: The incidental investment income deduction is not available to banking, lending, or security businesses as those entities are defined in RCW 82.04.4281. 
  • Distributions or dividends (RCW 82.04.4281(1)(b)), provided that: 
    • For distributions, the amounts are derived from the business’s profits (i.e., an owner’s percentage or share of the profits) or retained earnings. 
    • For distributions, the amounts are not a guaranteed payment. 
    • The amounts are not compensation for goods and/or services provided to the business. 
  • Amounts derived from bona fide endowment funds. See RCW 82.04.4282 and our Investments tax topic article. 

Apportionment

Generally, investment income is subject to business and occupation (B&O) tax under the Service and Other Activities classification. For information about the apportionment of investment income for businesses other than financial institutions defined in WAC 458-20-19404(3)(i), see our Investments Tax Topic article section entitled “Apportionment of investment income for businesses other than financial institutions.”

Persons not engaging in business

Persons who are not engaging in business are not subject to B&O tax on their income earned from investing. This category generally includes individuals who invest their own personal assets. 

“Engaging in business" means commencing, conducting, or continuing in business, and also the exercise of corporate or franchise powers, as well as liquidating a business when the liquidators thereof hold themselves out to the public as conducting such business. See RCW 82.04.150. 

As noted above, tThe department is currently working on additional guidance to clarify what it means to engage in business. 

Entities entitled to unlimited investment deduction

Nonprofit organizations 

Qualifying nonprofit organizations, as defined in RCW 82.04.3651, may deduct all of their investment income, even if it is not incidental to the main purpose of the taxpayer’s business. 

Investment vehicles 

Certain investment vehicles may deduct all of their investment income, even if it is not incidental to the main purpose of the person’s business: 

  • Collective investment vehicles (CIV). 
  • For more information, see our interim guidance statement regarding CIVs. 
  • Family investment vehicles (FIV) and recipients of distributions therefrom. 
  • Retirement accounts and recipients of distributions therefrom. 

These entities qualify for an unlimited investment income deduction regardless of the reporting period, including periods prior to January 2026. 

Issues we are working on

  • What is an investment? 
  • Are some types of interest deductible? 
  • Are gains from real estate considered gains from “investments,” and are such gains excluded from B&O tax? 
  • What amounts are included in “total worldwide gross income of the business annually” for purposes of the ESHB 2081? 
  • Can a business estimate their investment income on their monthly or quarterly returns and then “true up” at the end of the year? 
  • Is investment income determined on a net basis? 
  • How to determine whether a person is “engaging in business” for Washington purposes? 
  • What is factoring for purposes of ESHB 2081? 

More information

Coming soon.