What to Know About the New Tax in Washington State
Understand how Washington's new capital gains tax affects you. Learn about residency rules, major exemptions like real estate, and your filing obligations.
Washington state has a tax on certain long-term capital gains that took effect on January 1, 2022. The tax applies to gains exceeding a standard deduction, which is adjusted annually for inflation. For gains under $1 million, the rate is 7%, while gains exceeding $1 million will be taxed at 9.9% starting January 1, 2025.
The Washington State Supreme Court affirmed the tax’s legality in 2023, classifying it as an excise tax on the sale of assets. Revenue from this tax is designated to fund investments in childcare and early learning programs.
Determining Who is Subject to the Tax
The Washington capital gains tax applies to individuals. An individual who is a resident of Washington or is domiciled in the state is subject to the tax on their applicable long-term capital gains. The tax extends to gains allocated to individuals from pass-through entities such as S corporations and partnerships but does not apply to corporations directly.
The tax also applies to trusts and estates if they are considered residents of Washington. For part-year residents, liability depends on their residency status at the time the capital gain is recognized. Gains recognized while a person is a resident of Washington are subject to the tax.
Married couples who file a joint federal income tax return are required to file a joint Washington capital gains tax return. They are entitled to a single standard deduction on that joint return.
Identifying Taxable Capital Gains
The tax specifically targets net long-term capital gains, defined as the profit from an asset held for more than one year, a definition consistent with federal tax law. For Washington’s tax, the calculation of net long-term capital gain involves subtracting any long-term capital losses that have occurred since the tax’s inception in 2022. Washington does not permit short-term capital losses to be used to offset long-term capital gains.
Gains Subject to the Tax
The tax is primarily aimed at gains from the sale of intangible personal property, including stocks, bonds, and similar investments. Interests in a business are also included. The tax also applies to the sale of certain tangible personal property if that property is located within Washington state at the time of the sale.
Exemptions from the Tax
The law provides for several exemptions for gains from the sale of certain assets. All real estate is exempt, including a primary residence, rental property, or undeveloped land. This exemption applies to real estate located both inside and outside of Washington.
Assets held within retirement savings accounts are also exempt. This includes gains from assets sold within accounts like 401(k)s, Individual Retirement Arrangements (IRAs), and other federally recognized retirement plans.
An exemption is available for the sale of certain qualifying family-owned small businesses. To qualify, the business must have worldwide gross revenue of $10 million or less in the 12 months preceding the sale.
Other exemptions include gains from the sale of:
- Timber and timberlands
- Livestock used in agriculture
- Commercial fishing privileges
- Goodwill received from the sale of an automobile dealership
Required Information and Tax Calculation
To calculate the tax, taxpayers begin with the information from their federal income tax return, specifically Federal Schedule D, “Capital Gains and Losses.” This federal form provides the necessary figures for long-term gains and losses that serve as the starting point for the state calculation.
Once the federal net long-term capital gain is determined, the next step is to subtract any gains from assets that are specifically exempt under Washington’s law. After adjusting for these exempt assets, the taxpayer applies the standard deduction, which is $270,000. This amount is subtracted from the adjusted net long-term capital gain.
If a positive amount remains after the standard deduction, the tax rate is applied to this figure to determine the tax liability. For example, if an individual has a Washington-specific net long-term capital gain of $400,000, they would first subtract the $270,000 standard deduction, leaving $130,000. The tax owed would be 7% of $130,000, which is $9,100.
Taxpayers may also be eligible for a credit for any Business and Occupancy (B&O) tax that was paid on the same transaction that generated the capital gain. Documentation proving the payment of the B&O tax is required to claim this credit. This information is compiled to complete the Washington Capital Gains Tax Return.
How to File and Pay the Tax
The Washington Capital Gains Tax Return and any associated payment are handled electronically. Taxpayers must use the Washington Department of Revenue’s online portal, known as “My DOR.” This system is the designated platform for filing the return and managing tax obligations.
The filing deadline for the Washington capital gains tax return is aligned with the federal income tax deadline, which is April 15th of the following year. If the federal deadline is extended, the state deadline also extends. Filing by this date is important to avoid potential penalties and interest.
Payment of the tax can also be made through the My DOR portal. The system offers electronic payment options, including an electronic funds withdrawal from a bank account. Taxpayers may also have the option to pay using a credit card, though this may involve a processing fee.
After the return has been successfully submitted through the online portal, the taxpayer should receive a confirmation number. This confirmation serves as proof that the filing has been received by the Department of Revenue, and it is advisable to save this number for personal records.