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Filing Washington State Capital Gains Tax

On March 23rd, 2023 the Washington State Supreme Court ruled 7-2 to uphold the constitutionality of the state capital gains tax. This ruling overturned the Douglas County Superior Court ruling a year ago that the capital gains tax was unconstitutional and invalid as it was an income tax rather than an excise tax. 

Washington Governor Jay Inslee signed ESSB 5096 into law on May 4, 2021, introducing a 7% tax on the sale of long-term capital assets sold after January 1, 2022. The tax only applies to long-term capital gains exceeding $250K and a number of assets are exempt from the law (most notably real estate). The $250K exemption amount does not increase for married couples filing jointly. 

Taxpayers who owe the tax will be required to file their 2022 tax by April 18, 2023. The new law imposes a late filing penalty of 5% per month up to a maximum of 25% of the tax due. Additionally, Washington charges late payment penalties which range from 9% to 29% of the tax due. 

The new tax also comes with some serious criminal penalties: 

  • Any taxpayer who knowingly attempts to evade payment of the tax imposed under this chapter is guilty of a class C felony as provided in Chapter 9A.20 RCW.
  • Any taxpayer who knowingly fails to pay tax, make returns, keep records, or supply information, as required under this title, is guilty of a gross misdemeanor as provided in Chapter 9A.20 RCW.

What assets are subject to the tax?

Washington defines capital assets in the same way as federal tax law. Thus the sale of equities, fixed income securities, partnerships, business assets, and other capital assets held for at least one year are potentially subject to the tax. Note that the tax applies to individuals only. The bill was designed to avoid taxing capital assets that are physically located outside of the state of Washington. 

What assets are exempt from the tax?

The major exemptions to the law are real estate and qualified small family-owned businesses. Here’s what makes a qualified small family-owned business:

  • Worldwide gross revenue of $10M or less in the 12-month period immediately preceding the sale/transfer
  • Owner held their ownership interest for at least 5 years before the sale of the business
  • Owner materially participated in operating the business in 5 out of the last 10 years (unless the sale is to a qualified heir)
  • Business owner must be one of the following:
    • Sole proprietor
    • Own at least 50% of a business owned by taxpayer and family
    • Own at least 30% of a business where at least 70% of business is owned by 2 families or 90% of business is owned by 3 families. 

Here’s the full list of exemptions from the tax:

  • 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 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.

There is also a deduction for charitable donations in excess of $250K per taxpayer. The charitable donations deduction cannot exceed $100K per year per taxpayer

How to file Washington State Capital Gains Tax

  • Create an account with Secure Access Washington (SAW)
  • Create a capital gains account
  • If utilizing your CPA to file your return, add them as an “Account Manager” user. It’s suggested you then make them an ‘Administrator.’
  • When your CPA has completed the return, sign back into the SAW website so you can review your return and then file and pay your capital gains tax. 
  • If not using a tax preparer or CPA to complete your return here are the steps you will need to follow:
    • Enter your long-term capital gains summary from Schedule D of your federal 1040 return. Enter the total of gains/losses not allocated to Washington and any loss carryforward not allocated to Washington
    • Enter or upload a detailed list of each transaction that total your long-term capital gains/losses allocated to Washington. 
    • If applicable, enter charitable donation information to receive a reduction in your capital gains.
    • If applicable, fill out the Qualified family-owned small business deduction page
    • Submit Payment


If you file an extension for your Federal tax return then your Washington State capital gains tax is automatically extended too. However, just like with your Federal income tax, your payment to Washington is still due by April 18th if you’ve extended. 

Scott Caufield, CFA, CPA