The Capital Gain Tax in Washington State
Understand your obligations under Washington's 7% capital gains tax. Our guide clarifies its limited scope and details the complete state compliance process.
Washington imposes a tax on certain long-term capital gains that exceed an annual threshold. Established by the 2021 state legislature, this tax applies to individuals and is distinct from federal tax obligations. It targets gains from the sale or exchange of assets like stocks and bonds. The tax is calculated based on gains recognized on or after January 1, 2022.
Determining if the Tax Applies to You
The Washington capital gains tax applies to individuals, including those who realize gains through ownership in pass-through entities. The starting point for the tax is your federal net long-term capital gain, which is gain from assets held for more than one year. For individuals domiciled in Washington, their gains from intangible assets like stocks are allocated to the state and subject to the tax. The tax does not apply to short-term capital gains or other forms of income such as dividends and interest.
A number of asset types are specifically exempt from this tax. One of the primary exemptions is for the sale of all real estate, which applies whether the property is sold by an individual or through a pass-through entity. This means the profit from selling a primary residence, vacation home, or rental property is not subject to this state tax.
Another category of exempt assets includes those held within certain retirement accounts. Gains realized from sales within an IRA, 401(k), or other qualified employee benefit plan are not taxed under this law. The law also provides exemptions for several other specific assets, including:
- The sale of timber and timberland
- Certain types of livestock
- Commercial fishing privileges
- Depreciable property used in a trade or business that is eligible for a deduction under IRS Section 179
- The gain from the sale of goodwill from an auto dealership
Calculating the Washington Capital Gains Tax
The calculation begins with your federal net long-term capital gain amount. From this figure, you subtract a standard deduction, which is adjusted annually for inflation. This deduction is available per individual or married couple, meaning spouses filing jointly share one standard deduction.
Beyond the standard deduction, taxpayers may be eligible for other deductions. One such deduction is for the sale of a qualified family-owned small business. To qualify, the business must have had worldwide gross revenue of $11 million or less in the 12 months preceding the sale. This allows owners to subtract the gain from the sale of their qualifying business interest.
Another deduction is available for charitable contributions. A taxpayer can deduct the amount of their charitable donations made to qualified Washington-based non-profits that exceed the annual standard deduction. This deduction itself is capped at $100,000 per year.
After all deductions are taken, a flat 7% tax rate is applied to the final Washington capital gain. For example, if a taxpayer has a Washington capital gain of $1.2 million after all deductions, the tax would be 7% of that amount. This results in a total tax liability of $84,000.
Required Information and Forms for Filing
To prepare for filing the Washington capital gains tax, you will need your completed federal tax documents. The primary document needed is your federal income tax return, Form 1040, and its supporting schedules for capital assets. These include Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets).
The state-specific form is the Washington State Capital Gains Tax Return. Only individuals who owe the tax are required to file this return. When completing the Washington return, you will transfer the net long-term capital gain reported on your federal Schedule D as the starting point for the calculation. You must attach a copy of your federal tax return to your Washington return when you file.
Filing and Paying the Tax
The process of submitting your Washington Capital Gains Tax Return is handled electronically through the Washington Department of Revenue’s online system, MyDOR. This electronic filing mandate applies to the return and all necessary documentation. A waiver may be requested for good cause if approved in advance. For those using a tax professional, it is possible to grant the CPA access to your capital gains account to file on your behalf.
Payment of the tax is due on the same date as the filing deadline. The primary payment methods available through the online portal include electronic funds withdrawal or payment by credit or debit card. Taxpayers should be aware that paying by card may involve a processing fee. It is also possible to pay by check if filing by mail after receiving an electronic filing waiver.
The deadline for both filing the return and paying the tax coincides with the federal income tax deadline, April 15th. If you receive an extension for filing your federal return, you are also eligible for an extension to file your Washington return; however, this must be requested separately through MyDOR. An extension to file does not extend the time to pay the tax, which must still be paid by the original due date to avoid penalties. After submitting electronically, you should receive a confirmation number as proof of your filing.