Strategies for navigating Washington state capital gains tax in 2025

In November of 2024, Washington state voters rejected Initiative Measure No. 2109, which aimed to repeal the state’s capital gains tax. With the tax remaining in place, high-net-worth individuals must carefully evaluate its impact on their financial planning, investment strategies and estate planning.

Who is affected by capital gains tax?

Washington state imposes a 7% tax on the sale or exchange of certain long-term capital assets, including intangible assets, such as stocks and bonds. In 2024, taxpayers are allowed a deduction of $270,000 in calculating their capital gains subject to tax. The deduction amount is indexed annually for inflation and exempts capital gains under that threshold from tax. Married couples filing a joint federal return must also file jointly in Washington, and they are limited to a single $270,000 deduction on their joint return. However, the tax does not apply to the sale of real estate, transactions within retirement accounts, sales of livestock, sales of qualified family-owned small businesses and several other items.

Net long-term capital gain arises from the sale of assets held for greater than one year. For Washington state tax purposes, long-term capital gain is reduced by any long-term capital losses incurred since 2022. Notably, Washington does not allow short-term losses to offset long-term gains, which differs from federal tax treatment. This distinction is important for taxpayers when planning investment strategies and tax loss harvesting under the state’s capital gains tax framework.

An individual’s domicile or residency status in Washington plays a crucial role in determining whether the tax applies. For intangible asset sales, gains or losses are taxable in Washington if the individual is domiciled in the state. For tangible personal property sales, both the location of the property and the taxpayer’s residency status are considered.

An individual is considered domiciled in Washington if they intend to remain in the state indefinitely. A person is classified as a resident if they are domiciled in Washington, unless they (1) did not maintain a home in the state, (2) maintained a home in another state and (3) did not spend more than 30 days in Washington. Additionally, a person is deemed a resident if they were not domiciled in Washington but maintained a residence in the state and were present for more than 183 days.

Should you move to avoid the tax?