A new excise tax on capital gains in excess of $250,000 beginning January 1, 2022 has passed the Washington legislature and is expected to be signed into law by Washington Governor Inslee shortly.  The new tax proceeds are earmarked exclusively for early education and childcare.  The tax will apply to all Washington residents with long-term capital gains or out-of-state resident’s capital gains arising from the sale of tangible personal property located in Washington State.  Intangible property is allocated to the owner’s state of domicile, meaning to a resident of Washington.

Capital Gains Defined:  The Washington statute defines “adjusted capital gains” as sales of stocks, bonds, other investment sales such as the sale of a business interest. The adjustment will be to remove both gains and losses not allocated to Washington as well as any gains and losses that are exempt from the tax.

Exemptions from Capital Gains:  For purposes of this tax, capital gains do not include gains from the following:

1. Sale of real estate land/structures
2. Assets held in retirement accounts
3. Assets transferred as part of condemnation proceeding
4. Livestock sales
5. Business property subject to depreciation
6. Timber sales
7. Goodwill received from the sale of a franchised auto dealerships

Calculation Process:

1. Begin with long-term capital gain on federal income tax return.
2. Remove any exempt gains (listed above) or long-term losses included in the gain.
3. Deduct $250,000
4. If applicable, deduct any proceeds (up to $100,000) donated to one or more qualified charitable/non-profit organizations.
5. If the sale or portion thereof relates to the sale of an interest in a qualified family-owned small business, deduct the amount of long-term capital gain relating to the sale.
   1. A qualified family-owned small business is defined as:
      1. A business with less than $10 million in sales in the year proceeding the sale AND
      2. In which the subject taxpayer materially participated in the operation for at least five of the past 10 years preceding the sale. AND
      3. The subject taxpayer must also have had an ownership interest in the business for at least five years preceding the sale.

Interaction with B&O Tax and other State Taxes: A credit will be allowed for any proceeds already taxed for Washington B&O purposes. The same is true if the capital gain is taxed by another state jurisdiction. The credit may not exceed the subject capital gain. It is a non-refundable credit. There is no carryback or carryforward of unused credits.

The due dates of the tax return will coincide with the federal tax return for individuals and the first one will be due April 18, 2023.   While the tax is labeled as an excise tax, it is anticipated that it will be contested as an income tax which are prohibited by the State of Washington’s constitution.

Our expert team of state and local tax professionals at Geffen Mesher is ready and prepared to answer any questions that you may have on this Washington capital gains tax or any other state and local tax issue and can be reached at SALT@gmco.com.