Washington State Capital Gains Tax: What You Need to Know
In 2021, Washington state enacted a law imposing a capital gains tax on the sale of specific assets. This tax targets Washington state residents and has faced legal challenges. However, the Washington Supreme Court upheld the tax's constitutionality, meaning it will apply to all tax years from 2022 onward. For more details, visit the Washington State Department of Revenue website.
Here are some common questions about this tax:
Who is affected by this tax? The tax generally applies to Washington state residents. In certain situations, nonresidents may also be subject to the tax if the capital gains from selling or exchanging tangible personal property are allocated to Washington. The tax applies once long-term capital gains exceed an inflation-adjusted limit, known as the standard deduction. For the 2022 tax year, this limit is $250,000; for 2023, it is $262,000. The limit for 2024 has yet to be released, but it is expected to increase. This limit is the same for both single and joint filers.
How much is the tax? The tax imposes a 7% rate on long-term capital gains that exceed the inflation-adjusted limit. For example, if you had $300,000 in long-term capital gains in 2022, the 7% tax would apply to $50,000, as the first $250,000 is exempt.
What asset sales are subject to this capital gains tax? The tax generally applies to sales of:
Long-term capital gains (assets held for over a year)
Stocks and equities
Bonds and other debt instruments
Certain business interests
Various other investments and tangible assets
What asset sales are exempt from this tax? The following are generally exempt:
Short-term capital gains (assets held for a year or less), meaning day traders with short-term sales are not impacted.
Retirement accounts (e.g., IRAs or employer-sponsored plans).
Real estate and land (normal real estate transaction taxes still apply).
Certain qualified family-owned small business sales.
Depreciable assets used in a trade or business.
Livestock from a ranch or farm.
Timber or timberland.
When is the tax due? The tax is due on the same date as your federal income tax return. If you owe capital gains tax, you must file a state capital gains return along with a copy of your federal tax return. Since Washington does not have an income tax, no state return is required unless your long-term capital gains exceed the annual limit. If you file a federal extension, the same extension applies to your state capital gains tax return. However, you must still pay the taxes by the original due date to avoid penalties and interest.
Can I use losses to offset the capital gains tax? Only long-term capital losses from 2022 onward can be used to reduce the state capital gains tax. Short-term capital losses and losses from before 2022 cannot be used to offset this tax.
If I have gains from day trading, will I be impacted by this tax? Day traders are generally not impacted by this tax since short-term asset sales are exempt. However, if a trader realizes long-term capital gains that exceed the limit, they will be subject to the tax, even if they have IRS "trader status."
Bottom line: While this tax may not affect all Washington residents, those impacted should consult with a tax professional and financial advisor to explore potential tax planning strategies to reduce their capital gains tax liability. If you want to discuss this further, we offer a complimentary 15-minute call to discuss your concerns and share how we can help.
This material was written in collaboration with artificial intelligence (ChatGPT) and derived from sources believed to be correct.
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