Checking in on the Washington State Capital Gains Tax

Back in the 2021-2022 legislative session, the Washington State Legislature passed ESSB 5096 (now codified at RCW 82.87), commonly known as the Washington State capital gains tax. This bill created 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. Challenges to the legality of the new tax wound their way through the state courts and culminated recently on March 24, 2023 when the Washington Supreme Court ruled 7-2 to uphold the tax as a legitimate excise tax rather than an unconstitutional income tax.

So now that it looks like the tax is here to stay for the time being, how does it work exactly? The tax applies to gains made on or after January 2022. The first payments were due to the Washington State Department of Revenue on or before April 18, 2023. Going forward, the tax will be paid on a calendar year basis and will be due at the same time as a person’s federal income tax return. The tax kicks in when a person receives capital gains of more than $250,000.00 on the transfer of the various asset classes listed above. In such situations, 7% of the gain is subject to the tax and payable to the Department of Revenue. Notably, the tax applies to individuals and not to business entities, with the exception of those business entities which are considered pass-through entities or disregarded entities for federal tax purposes (e.g., S-corporations, partnerships, single-member LLCs, grantor trusts etc.). Married couples do not get an increased standard deduction (rather, the standard deduction of $250,000.00 per year is the same for individuals, married couples, and domestic partnerships). There are a number exemptions to the tax, including transfers of real estate, retirement account assets, timber and timberland, particular agricultural products, commercial fishing privileges, and eligible family-owned small businesses.

The initial impact of the tax is expected to be somewhat limited. It is estimated that the wealthiest 7,000 households in the state will be affected by the tax. Additionally, the standard deduction amount is set to be adjusted annually for inflation. Revenue collected by the state is earmarked for funding early-childhood education programs and school construction.