Understanding Washington capital gains tax

On May 4, 2021, Washington Gov. Jay Inslee signed legislation (ESB 5096, RCW 82.87), a bill which creates a new Washington excise tax on the sale or exchange of certain capital assets. Specifically, starting Jan. 1, 2022, Washington imposes a 7% excise tax on Washington residents for the sale or exchange of over $250,000 of long-term gain from capital assets reported on their federal tax return.

The Washington excise tax base includes all long-term capital assets with the exception of the following:

• All real estate assets;
• A controlling interest in an entity, only to the extent that any long-term capital gain or loss from such sale or exchange is directly attributable to the entity's interest in real property and the sale or exchange was subject to state real estate excise tax;
• Assets held under a retirement savings account, a tax-sheltered annuity or custodial account, a deferred compensation plan, an individual retirement account or individual retirement annuity, a Roth individual retirement account, an employee defined contribution program, an employee defined benefit plan, or a similar retirement savings vehicle;
• Assets pursuant to, or under imminent threat of, condemnation proceedings by the United States, the state or any of its political subdivisions, or a municipal corporation;
• Cattle, horses or breeding livestock if for the taxable year of the sale or exchange, more than 50% of the taxpayer's gross income for the taxable year, including from the sale or exchange of capital assets, is from farming or ranching;
• Property used in a trade or business that is depreciable under section 167(a)(1) of the Internal Revenue Code or that qualifies for expensing under section 179 of the Code;
• Timber, timberland or the receipt of Washington capital gains as dividends and distributions from real estate investment trusts derived from gains on the sale or exchange of timber and timberland;
• Commercial fishing privileges; and
• Goodwill received from the sale of certain auto dealerships.

In addition to the above exceptions, Washington residents are permitted a deduction from the excise tax base for the following:

• A standard deduction of $250,000 per individual, or in the case of spouses or domestic partners, their combined standard deduction is limited to $250,000, regardless of whether they file joint or separate returns;