Washington State has enacted a 7% excise tax on long-term capital gains over $250,000 (adjusted annually for inflation) from sales of stocks, bonds and certain other capital assets held for one year or longer. The tax, which is imposed beginning January 1, 2022, applies only to individuals.
In March 2022, a Washington superior court held that the capital gains tax was unconstitutional and should be characterized as an income tax, rather than an excise tax. In November 2022, the Washington Supreme Court granted the state’s motion to stay the lower court’s order. Currently, the lower court order is stayed pending the Supreme Court’s final decision in the matter. The stay allows the Department of Revenue to administer and collect the 7% tax. If the state Supreme Court finds the new law unconstitutional, payments would be refunded to taxpayers.
On January 28, 2023, the Washington State Department of Revenue adopted WAC 458-20-300 to clarify certain aspects of the tax. Only individuals owing capital gains tax are required to file a capital gains tax return. The capital gains tax return is due the same time as the individual’s federal income tax return is due (including extensions). However, filing an extension only extends the time to file the return and not the time to pay the tax due. Penalties will apply to late returns and penalties and interest will apply to late payments.
Capital Gains Tax Returns and extension requests must be submitted electronically via the My DOR portal on or before the original due date of the return. Extensions can be requested through the MyDOR portal by certifying federal Form 4868 was properly filed for the tax year. A copy of your completed federal tax return, and federal Form 4868, if applicable, must be attached to the Washington State Capital gains excise tax return when filed.
Payments must be paid by electronic funds transfer or other form of department authorized electronic payment, such as by credit card.
Capital gains is your federal net long-term capital gain. Generally, long-term capital gains or losses from the sale or exchange of tangible personal property are allocated to Washington if the property was located in the state at the time of the sale or exchange. Long-term capital gains or losses derived from intangible personal property are allocated to Washington if the taxpayer was domiciled in the state when the sale or exchange occurred.
Exemptions, deductions, and credits
There are several exemptions, deductions, and credits that may reduce the taxable amount of long-term gains.
- 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.
- 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.
- 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.
- 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.
We will provide updates to this legislation as it becomes available. If you have any questions or would like to discuss the Washington capital gains tax further, please reach out. We’d be happy to talk with you further.