Planning to realize significant long-term gains? Here’s what you need to know.

What: A new flat rate tax of 7% on long-term capital gains above $250,000.

Who Pays: Those whose primary residence is in Washington State and anyone who has gains from the sale of tangible personal property located in Washington.

A person is a “resident” of Washington if they are physically present for more than 183 days during a calendar year

What is Taxed: Long-term gains from the sale or exchange of capital assets. As a reminder, long-term gains refer to gains on the sale of assets held for at least 12 months. Short-term gains are applicable to assets held less than 12 months and are taxed at ordinary income tax rates.

What is Exempt: There is a wide swath of exemptions, gains on the sale of real estate are perhaps the most notable. Other exempt classes include:

• Investments within retirement accounts.
• Business transactions that do not generate capital gains or taxable income.
• Certain qualified family-owned small businesses.
• Private property sold for public use (eminent domain.)
• Certain extraction/agricultural industry rights (fishing, timber, etc.)

Logistics: Individuals and spouses receive an annual standard deduction of $250,000. The 7% tax is applied to capital gains exceeding this deductible amount. Be sure to review with your tax advisor. While limited, there are areas for additional planning. For example, an additional deduction for up to $100,000 for charitable contributions in excess of $250,000 made to Washing-based nonprofits.

Backstory: Senate Bill 5096, “Concerning an excise tax on gains from the sale or exchange of certain capital assets” passed the Washington Senate by one vote and was signed by Governor Jay Inslee in May 2021. Similar to past legal battles over the installation of a state-wide income tax, opponents of the bill argue that the tax violates the Washington State Constitution’s requirement that taxes on property (which includes income) be uniform and limited to 1%. Proponents believe that the characterization of the new tax as an excise tax – rather than a tax on income – alleviates the constitutional issue. Lawsuits fighting the new tax have been filed.

Next Steps: Please contact us if you have questions about how Washington’s capital gains tax might impact your financial situation.

For additional Reading:
http://lawfilesext.leg.wa.gov/biennium/2021-22/Pdf/Bills/Session%20Laws/Senate/5096-S.SL.pdf
https://clarknuber.com/articles/overview-washington-state-capital-gains-tax/
https://www.helsell.com/2021/05/10/washingtons-new-capital-gains-tax/