Capital gains tax

In March of 2022, the Douglas County Superior Court ruled in Quinn v. State of Washington that the capital gains excise tax (ESSB 5096) does not meet state constitutional requirements and, therefore, is unconstitutional and invalid. The State has appealed the ruling to the Washington Supreme Court. While the appeal is pending, the Department will continue to provide guidance to the public regarding the tax as a courtesy. Any guidance provided herein will apply only if the tax is ruled constitutional and valid, in its entirety, by a court of final jurisdiction.

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The 2021 Washington State Legislature recently passed ESSB 5096 (RCW 82.87) which creates a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments and tangible assets.

This tax only applies to individuals. However, individuals can be liable for the tax because of their ownership interest in a pass-through or disregarded entity that sells or exchanges long-term capital assets. The tax only applies to gains allocated to Washington state.

There are several deductions and exemptions available that may reduce the taxable amount of long-term gains, including an annual standard deduction of $250,000 per individual. In the case of spouses or domestic partners, the combined standard deduction is limited to $250,000 whether they file joint or separate returns.  

The tax takes effect on Jan. 1, 2022, and the first payments are due on or before April 18, 2023.

The revenue collected from this tax will fund the education legacy trust account and common school construction account.

Exemptions

The sale or exchange of the following assets are exempt from the Washington capital gains tax:

  • Real estate.
  • Interests in a privately-held entity to the extent that the capital gain or loss from such sale or exchange is directly attributable to the real estate owned directly by such entity.
  • Assets held in certain retirement accounts.
  • Assets subject to condemnation, or sold or exchanged under imminent threat of condemnation.
  • Certain livestock related to farming or ranching.
  • Assets used in a trade or business to the extent those assets are depreciable under Title 26 U.S.C. Sec. 167(a)(1) of the internal revenue code or qualify for expensing under Title 26 U.S.C. Sec. 179 of the internal revenue code.
  • Timber, timberlands, and dividends and distributions from real estate investment trusts derived from gains from the sale or exchange of timber or timberlands.
  • Commercial fishing privileges.
  • Goodwill received from the sale of a franchised auto dealership.

Deductions

The following deductions apply:

  • A standard deduction of $250,000 per year per individual, married couple, or domestic partnership. This amount is adjusted for inflation annually.
  • The long-term capital gain from an individual’s sale of all or substantially all of a qualified family-owned small business.
  • Charitable donations in excess of $250,000 per year per individual. The charitable donations deduction cannot exceed $100,000 per year per individual. These amounts are adjusted for inflation annually.

Credits

The following tax credits are available:

  • A business and occupation (B&O) tax credit for B&O taxes due on the same sale or exchange which is subject to the Washington capital gains tax.
  • A Washington capital gains tax credit for the amount of any legally imposed income or excise tax paid by the individual to another taxing jurisdiction on capital gains derived from capital assets within the other taxing jurisdiction to the extent such capital gains are included in the individual's Washington capital gains.

How to report and pay the tax

Only individuals owing capital gains tax are required to file a capital gains tax return, along with a copy of their federal tax return for the same taxable year. The capital gains tax return is due at the same time as the individual's federal income tax return is due. Individuals who receive a filing extension for their federal income tax return are entitled to the same filing extension for their capital gains tax return. However, a filing extension does not extend the due date for paying the capital gains tax due.

Penalties will apply to late returns. Additional penalties and interest will apply to late payments.

Questions

If you have general questions regarding Capital Gains or would like to request a binding ruling, please use our web page titled Request a tax ruling.

References

Chapter 82.87 RCW