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Washington’s 2025 Capital Gains Tax Hike: What Business Owners Need to Know

On May 20, 2025, Washington Governor Bob Ferguson signed Senate Bill 5813 into law, significantly increasing Washington’s capital gains tax.

“Old” Capital Gains Tax

The previous version of Washington’s capital gains tax, which became effective January 1, 2022, imposed a 7% tax on all gains from the sale or exchange of capital assets held for more than one year that exceeded an annually adjusted standard deduction. The tax contained certain deductions and exemptions, which are set forth below.

What’s New

Washington’s new capital gains tax is now characterized by a graduated tax structure, retroactive to January 1, 2025. As before, the state continues to tax long-term capital gains that exceed the standard deduction ($270,000 as of 2024) at 7%. However, the state now taxes all such capital gains above $1,000,000 at 9.9%, increasing the existing tax on such gains by 2.9%. All other components of Washington’s capital gains tax remain unchanged.

Please be aware that while the rest of the statute remains unchanged, certain amounts, such as the standard and charitable deductions and the small business revenue threshold for the small business deduction adjust annually for inflation.

Notable Exemptions

The new tax maintains the same exemptions as the old:

  • 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. For clarity, such gains not directly attributable to real estate are subject to the tax.
  • Assets held by retirement accounts (401(k), IRA, and similar accounts).
  • Limited categories of other assets, including cattle, timber, and fishing rights.

Qualified Family-Owned Small Business Deduction

Like the old tax, the new tax exempts gains from the sale of substantially all the assets or equity of certain “qualified family-owned small businesses.” The exemption is limited to businesses having a worldwide gross revenue of $10,790,000* or less in the 12 months immediately preceding the sale, along with ownership and other requirements being met.

*Adjusted annually for inflation (the 2025 amount has not been calculated yet).

Capital Gains Tax Applicable to Washington Residents

Washington’s capital gains tax applies to Washington “residents” — 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. Owners of Washington businesses who are not Washington residents are not subject to the Washington capital gains tax on a sale of the business.

Filing and Paying the Tax

Affected taxpayers must file a Washington capital gains tax return with the Washington Department of Revenue, along with a complete copy of their federal tax return for the year in which the relevant sale took place.  Taxpayers who extend their federal income tax return get the same filing extension for their capital gains tax return.  However, a filing extension does not extend the due date for paying the capital gains tax.

Contact Us for More Information

In one bill, Washington has substantially increased its capital gains and estate taxes (see our blog post on the new estate tax structure). We recommend that Washington business owners carefully evaluate their exit strategies to mitigate the potential impacts of these higher taxes. The PRK Livengood business team is available to consult.

 

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