Washington State's New Capital Gains Tax Explained: What You Need To Know
Washington state's recent adoption of an excise tax on capital gains has sparked much discussion and controversy. This tax is expected to generate millions of dollars in revenue for the state, but it also has the potential to affect a significant number of individuals and businesses. The tax applies to high earners who realize gains from the sale of certain types of investments. There was a court challenge to this new legislation; however, on March 24, 2023, the Washington State Supreme Court upheld the law and determined that the Washington capital gains tax is a constitutional excise tax. The tax went into effect Jan. 1, 2022, and the first payments are due on or before April 18, 2023.
What is the new tax?
It's a 7% tax on gains from the sale or exchange of long-term (held for more than 1 year) capital assets such as stocks, bonds, business interests, or other investments and tangible assets.
Who is affected by the tax?
This tax only applies to individuals. However, individuals can be liable for the tax because of their ownership interest in a pass-through or disregarded entity that sells or exchanges long-term capital assets. The tax only applies to gains allocated to Washington state. .
Are there any deductions or exemptions?
Yes. There are several deductions and exemptions available that may reduce the taxable amount of long-term gains.
- An annual standard deduction of $250,000 per individual. In the case of spouses or domestic partners, the combined standard deduction is limited to $250,000 whether they file joint or separate returns. This deduction is adjusted for inflation.
- 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.
- 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, such as IRAs, 401Ks, tax sheltered annuities, deferred compensation plans, employee defined contribution plans, employee defined benefit plans, and similar retirement savings 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 under Title 26 U.S.C. Sec. 167(a)(1) of the internal revenue code or qualify for expensing under Title 26 U.S.C. Sec. 179 of the internal revenue code.
- 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.
Impact on tax-loss harvesting?
This tax applies to long-term capital gains. As such you can subtract realized long-term capital losses to lower your net gain. However, unlike Federal taxes, you cannot apply net short-term losses to net long-term gains.
Washington state's excise tax on capital gains has caused much debate and concern among residents and businesses. Understanding when the tax applies, when it doesn't, and how to mitigate its impact is important for affected individuals and small business owners. Consult with your tax professional to see what strategies you can implement to reduce the impact.
This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal or state tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.