Overview of Washington State Capital Gains Tax

Governor Inslee signed Washington’s new capital gains tax (“the tax” or “the CGT”) into law on May 4, 2021.  The CGT imposes a 7% long-term capital gains tax on the “voluntary sale or exchange of stocks, bonds, and other capital assets [that were held for more than one year] where the profit [exceeds] $250,000 annually.”  It becomes effective January 1, 2022 for capital gains on or after that date.

Are real estate or retirement gains taxed?

Certain assets are exempted from the tax, including:

• All real estate, including:
  • Interests in privately-held entities to the extent that any long-term gain or loss from such sale is directly attributable to real estate owned by such entity.  Sales of interests in entities that own real estate are subject to the tax.
• Assets held by retirement accounts.
  • 401(k), 403(b), 457(b), IRA, Roth IRA, and similar accounts.
• Limited categories of other assets, including cattle, timber, and fishing rights.

Are proceeds from the sale of my small business taxed?

Maybe.  The CGT exempts gains from the sale of substantially all of the fair market value of the assets of “qualified family-owned small businesses,” or the sale of substantially all of the taxpayer’s interest in “qualified family-owned small businesses.” The exemption is narrow and complicated:

• The business must have had a worldwide gross revenue of $10,000,000 or less in the 12 months immediately preceding the sale; AND
• The taxpayer and family must have owned at least 50% of the business; AND
  • However, if two families owned at least 70% of the business, the taxpayer and family must have owned at least 30%.
  • Likewise, if three families owned at least 90% of the business, the taxpayer and family must have owned at least 30%.
• The taxpayer must have owned his or her interest for at least five years; AND
• The taxpayer or a family member must have materially participated in the business for at least five of the preceding 10 years.

Does the CGT apply to the assets I own either personally or as a business owner?

Potentially both.  The tax applies to “individuals,” not business entities.  However, according to the tax, individuals are considered to be the beneficial owners of long-term capital assets or property held by disregarded or pass-through entities: LLCs, S corporations, grantor trusts, and partnerships, to the extent of the individual’s ownership interest.  Thus, the CGT taxes the personal gains and losses of the individual as well as pass-through gains and losses.  Gains from sales by C corporations are not subject to the CGT.

To what and to whom does the CGT apply?

The CGT applies in three primary cases:

• Gains and losses from the sale of tangible personal property in Washington if the property was located in Washington at the time of sale; OR
• Gains and losses from the sale of tangible personal property if the property was located in Washington at any time during the year of the sale or the immediately preceding taxable year, the taxpayer was a resident at the time the sale occurred, and the taxpayer is not subject to income or excise tax on gain/losses in another jurisdiction; OR
• Gains and losses from the sale of intangible personal property if the taxpayer is lives in Washington with the intent to remain.

Washington “residents” are those who live in the state with the intent to remain, or maintain a place of abode and are physically present in the state for more than 183 days per year.

Filing and paying the tax

You must file your Washington CGT return along with a complete copy of your federal tax return with Washington’s Department of Revenue.  The first filing and payments are due on or before April 18, 2023.  Taxpayers who extend their federal income tax return get the same filing extension for their CGT return.  However, a filing extension does not extend the due date for paying the CGT.  Spouses who file their federal returns jointly must file a joint Washington CGT return.  If either spouse files a separate federal separately, both must file separate Washington CGT returns.

The CGT calculation is as follows:

• Start with Federal net long-term capital gain,
• Subtract long-term capital gain (plus losses) from the sale of exempt assets (defined above);
• Subtract long term capital gain (plus losses and plus loss carryforwards) not made in Washington;
• Subtract the amount of gain from the taxpayer’s interest in a family-owned small business (defined above);
• Subtract Washington charitable contributions over $250,000 (up to $100,000 of deduction);
• Subtract $250,000; then
• Multiply by the 7 percent rate to get the tax due

If you have any questions or need our help navigating the new capital gains tax, please contact one of us we would be more than happy to help, Ruric G. Ellings or John J. White.