The Washington State Capital Gains Tax Explained

In 2021, Washington state introduced a tax on certain long-term capital gains that exceed a specific annual threshold. The measure was legally challenged, but the Washington State Supreme Court upheld the law, classifying it as an excise tax on the sale or exchange of certain long-term assets. Revenue generated from this tax is designated to fund education and school construction accounts.

Individuals and Entities Subject to the Tax

The Washington capital gains tax is levied on individuals. Liability can also extend to individuals through their ownership in pass-through entities, such as S corporations, LLCs, and partnerships, that realize long-term capital gains. The tax does not apply directly to corporations or other business entities.

An individual’s connection to Washington determines if their gains are subject to the tax. This is established through domicile (a person’s permanent home) or by being a statutory resident, meaning they are physically present in the state for more than 183 days during the tax year. Gains are taxed if they are allocated to Washington based on the individual’s residency at the time of the sale. Non-residents are generally not subject to the tax unless they are selling tangible personal property located within the state.

The tax framework also addresses gains connected to trusts and estates. Non-grantor trusts and estates are not directly subject to the tax. However, if a trust distributes a long-term capital gain to a Washington-resident beneficiary, that individual may be liable for the tax on the distribution. For a grantor trust, the Washington-resident grantor is responsible for paying the tax on the trust’s capital gains.

Taxable Gains and Statutory Exemptions

The tax applies to net long-term capital gains, defined as profits from assets held for more than one year. Taxable assets include stocks, bonds, ownership interests in businesses, and tangible personal property.

Several asset types are exempt from the tax. These include:

• Gains from the sale or exchange of real estate, including personal residences and investment properties.
• Assets held within retirement accounts, such as a 401(k) or an IRA.
• Gains from the sale of timber, timberlands, and certain livestock.
• Commercial fishing privileges.
• Assets transferred due to condemnation proceedings, such as through eminent domain.

An individual can deduct the long-term capital gain from the sale of a qualified family-owned small business. To qualify, the business must have had worldwide gross revenue below a certain threshold in the 12 months prior to the sale. This amount is indexed for inflation; for example, the threshold for a sale in 2024 was $11,936,000.

Calculating Your Tax Liability

To calculate the tax, start with the net long-term capital gain from your federal return. From this amount, subtract any gains exempt under Washington’s law, such as from the sale of real estate, to determine your “Washington capital gain.”

After determining your Washington capital gain, apply the standard deduction. This amount is indexed annually for inflation; for the 2024 tax year, it was $270,000 per individual. A married couple or domestic partnership shares one standard deduction, which must be split if they file separately.

The tax is calculated using a two-bracket system. A 7% tax rate is applied to the first $1 million of taxable gain, and a 9.9% rate applies to any taxable gain exceeding $1 million. For example, if your Washington capital gain is $370,000, after subtracting the $270,000 standard deduction, your taxable gain is $100,000. The 7% rate applies, resulting in a $7,000 tax payment.

Available Credits

To prevent double taxation, a credit is available for income or excise taxes paid to another state on the same capital gains. This credit directly reduces the Washington tax owed. A credit is also available for any Business and Occupation (B&O) tax paid on a sale or exchange that is subject to the capital gains tax.

Filing and Paying the Washington Capital Gains Tax

You must file the Washington Capital Gains Tax Return, which is available on the Department of Revenue’s website. To complete the return, you will need your personal details, the net long-term capital gain from your federal return, and figures for any Washington-specific adjustments.

The Department of Revenue encourages electronic filing through its My DOR portal. Alternatively, you can mail a paper copy of the return.

Payment can be made electronically through an ACH debit or credit/debit card, though card payments may have a processing fee. You can also mail a check or money order with a paper return. The annual deadline for filing and paying is April 15.