On January 16, 2024, the U.S. Supreme Court said it would NOT be reviewing the lawsuit challenging Washington State’s 7% tax on capital gains over $250,000 (Quinn v. Washington). So this tax will continue to apply on eligible gains realized in 2023 and is due this April.
Washington State does not have an income tax, so those who have recently moved to the Evergreen State may not realize there is now a capital gains tax. The tax affects only realized capital gains of $250,000 or more, and there are quite a few exceptions (see below).
Initially, it was estimated that this new tax would bring in some $400 million annually the first year enacted (April 2023 on capital gains realized in 2022). That turned out to be way off. In its first year, this tax brought double that — $900 million — into state coffers.
While Washington is not the only state with new taxes on upper income individuals and families, it is the first state in the U.S. with a capital gains tax. And this new tax is being challenged on multiple fronts, including by a conservative group that has filed a petition to repeal the tax, which Washington State voters may be voting on later in 2024.
WA Cap Gains Tax: Who Owes What
What: Flat 7% rate on long-term capital gains (assets held for at least 12 months). There is a $250,000 annual exemption for both singles and couples filing jointly.
When: Due April 15, 2024 on gains realized in 2023.
On Whom: People whose primary residence is in Washington State AND anyone who has gained from the sale of tangible personal property located in Washington (excluding real estate).
Wide Variety of Exemptions:
- Real estate – including distributions from privately held entities if the gain is from directly owned real estate
- Investments within retirement accounts (IRAs, Roth IRAs, 401ks, etc.)
- Business transactions that do not generate capital gains or are taxable as income, including tax-free mergers, transfers to partnerships, and gains from sales of qualified small business stock
- Family-owned small businesses with less than $10 million in annual revenue
- Certain business assets that can be depreciated or expensed
- Commercial fishing rights; timber and timberlands, including dividends and distributions from REITS (real estate investment trusts) derived from the sale or exchange of timber or timberlands
- Eminent domain transactions (private property sold for public use)
- The amount attributed to goodwill in the sale of a franchised auto dealership
NOTE: There is a limited charitable deduction for donations to WA State charities.
What about trusts? Trusts do not pay the tax. But any trust gains reported by the beneficiaries are subject to the new tax. A similar rule applies to partnerships, LLCs and other pass-through entities: the owners pay the new tax on their share of gains.
Read more about the WA capital gains tax in this LNW blog post:
