Washington state’s Supreme Court ruled on March 24, 2023, that an excise tax on capital gains is constitutional and valid, reversing the lower court’s decision that the tax violated the State’s constitution. The state Supreme Court ruling means the Washington Department of Revenue may continue to administer the tax, which took effect on January 1, 2022, with the first return and related payments due on or before April 18, 2023.
The new excise tax, approved by Washington State Legislature in 2021, creates a 7% tax on any individual gain in excess of $250,000 in a calendar year from the sale or exchange of certain long-term capital assets such as:
- Stocks
- Bonds
- Business interests
- Other investments and tangible assets
Washington Capital Gains Tax Filing Requirements
Taxpayers subject to the capital gains excise tax are required to file a capital gains tax return, along with a copy of their federal tax return for the same tax year. Whether or not an individual has already filed their federal return for 2022, they’ll need to file their 2022 capital gains tax return by April 18, 2023, or request an extension directly with Washington.
Although this tax only applies to individuals, many people could find themselves liable due to ownership interest in pass-through or disregarded entities that sell or exchange long-term capital assets.
Deductions and Exemptions
There are several deductions and exemptions available that may reduce taxable long-term gains, including an annual standard deduction of $250,000 per individual. Similarly, gains from the sale or exchange of real estate or assets held in certain retirement accounts are exempt from the excise tax.
Capital Gains Allocated to Washington
This tax is applicable to Washington residents and non-residents if their long-term capital gains allocated to the state exceed the standard deduction or do not qualify as exempt long-term capital gains.
Intangible personal property (stocks, bonds, etc.) are allocated to the state if the individual is a resident at the time of the sale or exchange.
Tangible personal property (art, collectibles, etc.) are allocated to the state if either of the following are true:
- The property is located in Washington at the time of the sale.
- The property is not located in Washington at the time of the sale, but all of the following are true:
- The property was located in Washington in the same year or the year before the sale took place.
- The individual is a Washington resident at the time of the sale.
- The sale was not subject to an income or excise tax by another jurisdiction.
Information and Resources for the Capital Gains Excise Tax in Washington State
The Washington State Department of Revenue is providing information online about the Supreme Court Ruling, as well as frequently asked questions about the capital gains excise tax.
Consistent with other taxes administered by the Washington Department of Revenue, taxpayers are required to create a “Capital Gains Account” via their online Washington account. If taxpayers do not already have an online Washington account, they can create one by signing up with the state.
Contact us to discuss the potential impact the Washington Capital Gains tax may have to you if you are a Washington resident or own interests in passthrough entities doing business in the state.
