On March 24, 2023, the Washington State Supreme Court declared the State’s long term capital gains tax is constitutional. The WA Supreme Court overturned the lower Court’s ruling and held that the capital gains tax was a valid excise tax (rather than an unconstitutional property or income tax) because it “relates to the exercise of rights in and to property” rather than being a tax on the ownership of property”. 

One of the two dissenting opinions summed it up perfectly and is why most of us probably didn’t take this seriously enough until now. “Capital gains are income. In Washington, income is property. A Washington capital gains tax is therefore a property tax.”. This case was simple. It appears to me that 7 of 9 Justices decided that adding tax revenues was more important than following the State’s constitution. I suspect it will not be long before this, or some other “excise” tax, is impacting many more Washington residents.  

What does this mean? 

It means that effective January 1, 2022, long-term capital gains exceeding $250,000 in a calendar year are subject to a 7% tax. The tax for the 2022 calendar year is due on April 18, 2023. Returns must be filed with the Washington Department of Revenue through their website. Unlike most state returns which I can prepare in the tax preparation software I buy, this requires taxpayers to get their own WA DOR accounts. A helpful video from the WA DOR on how to do this can be found here. I have to believe this will change, but for now, I cannot prepare these returns in the traditional manner I would use to prepare any other state income tax return. 

Who is subject to this tax?

Currently, only individuals are subject to this tax. While this tax does not apply to businesses, flow through entities (S corporations, partnerships, and many LLCs) can pass long term capital gain through to individuals and that income could be subject to this tax at the individual level.

What is exempt from the WA long-term capital gains tax?

· Any income that is not long-term capital gain. For stock traders, this means short term gains are not taxed. What it also means is that short term losses, which net with long term gains on federal returns, are not going to help you reduce WA taxes here. Long term means you have held the asset for greater than 1 year and 1 day. 

· Real Estate (whether held directly or indirectly (through a business entity))

· If the gain is excluded for federal purposes (e.g. 1202 exclusions, opportunity zone exclusions) it avoids the WA LTCG tax

· Assets held within retirement accounts 

· Installment sales that took place prior to January 1, 2022 are not subject to WA LTCG tax

· “Cattle, horses, or breeding livestock if for the taxable year of the sale or exchange, more than 50 percent of the taxpayer’s gross income for the taxable year,”


  • Property depreciable under Internal Revenue Code sections 167(a)(1) or 179,
  • “Timber, timberland, or the receipt of Washington capital gains as dividends and distributions from      real estate investment trusts derived from gains from the sale or exchange of timber and timberland,”
  • Commercial fishing privileges, and
  • Goodwill received from the sale of an auto dealership


What deductions are allowed?

· This was mentioned casually above. There is a $250,000 standard deduction. This serves to make gains in excess of $250,000 taxable.

· The $250,000 standard deduction can be increased by up $100,000 if you contribute at least $350,000 to a Washington based charity. It requires at least $250,000 of donation before you get your first $1 of donation, then caps out at $100,000. 

· For family businesses with $10M or less revenue, there is a deduction for long term capital gains resulting from the sale of these businesses. This gets more complicated if multiple families own the same business, and that is well beyond the scope of this post. 

Are there any tax credits?

· If your income was already subjected to the WA B&O tax, you can get a credit for any B&O tax paid on the same income. 

· If you paid income taxes in another state on the same property, WA gives a credit for taxes paid to those states similar to how most income tax states provide credit for taxes paid to other states. This is an issue most WA residents do not have to deal with since we haven’t had an income tax.

How can I plan around this tax?

· LEAVE!  Changing your residency would likely allow you to escape this tax. This tax is specifically targeting residents and most nonresidents should not have to pay this tax unless they move property out of the state. 

· Structure sales to get under $250,000 of long-term capital gain per calendar year

· Delay recognizing short term losses until those losses can become long term losses

What am I recommending right now?

· Provide complete information to your tax professional so they can determine if you have WA long term capital gains in excess of $250,000

· If you think you might be or definitely will be over this threshold, set up a capital gains tax account on the WA DOR website.

· Pay the tax on or before April 18 while requesting an extension (unless you can complete it)

· My hope is that before too long, this return can be prepared in normal tax software rather than pushing the responsibly from a tax professional to the individual