On March 24, 2023, Washington Supreme Court ruled that the state’s excise tax on capital gains is constitutional and reversed the decision of the Douglas County Superior Court after determining that the capital gains tax is appropriately characterized as a lawful excise tax because it is levied on the sale or exchange of capital assets rather than the capital assets or gains themselves. Because the capital gains tax is an excise tax under Washington law, it is not subject to the uniformity and levy requirements of Article VII of the Washington Constitution.
Washington’s capital gains tax is imposed at a rate of 7 percent on the sale or exchange of certain long-term capital assets. The tax applies only to nonexempt long-term capital gains that exceed $250,000 beginning Jan. 1, 2022. See Section 82.87 of the Revised Code of Washington for further details on capital gains tax.
WHO IS IMPACTED?
Individuals who generate capital gain from sources in the State of Washington are required to pay the Washington capital gains tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests or other investments and tangible assets beginning with the 2022 tax year.
This tax only applies to individuals, however individual owners of entities that are pass-through or disregarded entities for federal tax purposes may owe Washington’s capital gains tax on gains from sales or exchanges made by such entities. As the tax is effective as of Jan. 1, 2022, the first payments will be due on or before April 18, 2023.
The long-term capital gain derived from intangible personal property are allocated to Washington if the taxpayer was domiciled in Washington at the time the sale or exchange occurred.
The long-term capital gain from the sale or exchange of tangible personal property is allocated to Washington if the property was located in Washington at the time of the sale or exchange. If the property was located in another state at the time of the sale or exchange, it may still be allocated to Washington if the following are true:
- The property was located in Washington in the same year or the year before the sale took place.
- The individual was a Washington resident at the time of the sale.
- The sale was not subject to an income or excise tax by another jurisdiction.
HOW TO FILE
Individuals may file their capital gains excise tax return online through MyDOR. The return will be due at the same time as an individual’s federal income tax return. The extensions to file are permitted if the federal return has been extended. The payment will still be due on the original due date.
The tax is due on the sale or exchange of any long-term capital gain whether it is a tangible or intangible asset. The following items, including but not limited to, are exempted from the capital gains tax:
Length of ownership, type of ownership, type of property or location of the property do not impact this exemption
Interest in a privately held company
To the extent that the long-term capital gain or loss from the sale or exchange is directly attributable to the real estate owned directly by such entity
Assets held in certain retirement accounts
401Ks in tax-sheltered annuities, deferred compensation plans, Roth IRAs, IRAs, employee-defined contribution/benefit plans or similar retirement savings accounts are excluded
Assets subject to condemnation
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
Livestock related to farming or ranching
Cattle, horses or breeding livestock for the taxable year of the sale or exchange if more than 50 percent of the taxpayer's gross income for the taxable year, including from the sale or exchange of capital assets, is from farming or ranching
Washington offers a standard deduction of $250,000. If an individual files jointly with a spouse or partner, the standard deduction amount does not increase or double. Other deductions will be allowed for the sale of a family-owned business, if qualified, and charitable donations in excess of $250,000 per year are limited to $100,000.
The individuals may claim the following credits:
- The credit for any Business and Occupation (B&O) taxes due on the same sale or exchange as subject to Washington capital gains tax
- The credit for income or excise tax paid to another jurisdiction
As the tax is effective starting tax year 2022, the payments are due very soon. Therefore, it is imperative that taxpayers act immediately to determine if they have a filing obligation.
As such, taxpayers that fail to timely file their returns or pay the tax due could be subject to interest as well as late-filing penalties, which are 5 percent per month up to a maximum of 25 percent, and late payment penalties, which range from 9 percent to 29 percent. Individuals who expect material transaction that may result in long term capital gain should plan ahead to understand the nuanced sourcing rules in Washington as well as the tax implications.
Contact GHJ’s State and Local Tax Experts for immediate assistance relating to Washington capital gains tax.