Does Washington State tax capital gains?
Edvin Givargis Published 10 minute read
The short answer
Yes, although Washington calls it something else. The state has no personal income tax, but beginning January 1, 2022 it has imposed an excise tax on the sale or exchange of long-term capital assets, payable only by individuals, at 7 percent of an individual's Washington capital gains under RCW 82.87.040(1)(a). For sales beginning January 1, 2025, RCW 82.87.040(1)(b) adds a further 2.90 percent on the portion of Washington capital gains exceeding $1,000,000, for a combined top rate of 9.9 percent; the legislature enacted that tier in May 2025 and applied it to the whole 2025 calendar year. Washington capital gains are measured after deductions, the most important of which is a standard deduction that started at $250,000 under RCW 82.87.060(1), is shared by spouses and domestic partners rather than doubled, and is indexed each October under RCW 82.87.150. The Department of Revenue reports the figure as $278,000 for tax year 2025. The base starts from federal net long-term capital gain, so only assets held more than one year are reached, and real estate, retirement accounts, depreciable business property, timber, and several narrower categories are carved out by RCW 82.87.050. The tax survived its constitutional test: the Washington Supreme Court held in Quinn v. State, No. 100769-8 (March 24, 2023), that it is an excise on the transaction rather than a tax on property, the Supreme Court of the United States denied review in January 2024, and voters rejected Initiative Measure No. 2109, which would have repealed it, in November 2024. What makes the tax a planning problem rather than a compliance item is RCW 82.87.100(1): gain on stock, partnership and LLC interests, and other intangibles is allocated to Washington if the seller was domiciled in Washington when the sale occurred, wherever the company itself does business.
What the tax reaches, and at what rate
The starting point is the federal return. Adjusted capital gain under RCW 82.87.020(1) is federal net long-term capital gain, adjusted to remove gains and losses that are exempt or not allocated to Washington, and a long-term capital asset under RCW 82.87.020(7) is simply a capital asset held for more than one year. Short-term gain is outside the tax entirely. Ordinary income never enters the base, which is why the tax reads, in practice, as a tax on liquidity events: the sale of a founder's shares, a block of appreciated public stock, a partnership interest, or an interest in a closely held company.
The exclusions in RCW 82.87.050 remove the categories most likely to generate large gains for ordinary households. Real estate transferred by a recorded instrument is exempt under subsection (1), and subsection (2) extends that treatment to the sale of an interest in a privately held entity to the extent the gain is directly attributable to real estate the entity owns directly, measured by fair market value less basis. Assets inside 401(k), 403(b), 457(b), and individual retirement accounts, and similar retirement vehicles, are exempt under subsection (3). Property depreciable under Internal Revenue Code section 167(a)(1) or eligible for section 179 expensing is exempt under subsection (6), which keeps most sales of business equipment outside the tax. The remaining exemptions cover condemnation, qualifying livestock, timber and timberland, commercial fishing privileges, and auto dealership goodwill.
Two deductions matter beyond the standard deduction. RCW 82.87.070 allows a deduction for gain on the sale of a qualified family-owned small business, which requires, among other things, at least five years of ownership immediately before the sale, material participation by the taxpayer or family members in at least five of the preceding ten years, and worldwide gross revenue of $10,000,000 or less in the preceding 12 months, a figure that is itself indexed. RCW 82.87.080 allows a capped deduction for charitable gifts above a floor to organizations principally directed and managed in Washington; for 2025 the Department reports a cap of $111,000 on donations exceeding $278,000.
The rate structure deserves precision. The $1,000,000 threshold for the additional 2.90 percent is measured against Washington capital gains, which RCW 82.87.020(16) defines as adjusted capital gain after the RCW 82.87.060 deductions, so a seller reaches the higher tier only after the standard deduction has been taken. Unlike the standard deduction, the $1,000,000 figure is not among the applicable amounts RCW 82.87.150 indexes, so inflation will steadily push more gain into the upper tier. And the tax follows ownership through structures: under RCW 82.87.040(4)(b)(i), an individual is the beneficial owner of long-term capital assets held by a partnership, limited liability company, S corporation, or grantor trust to the extent of the individual's federal ownership interest, and under RCW 82.87.040(4)(b)(ii) a nongrantor trust funded by an incomplete gift is treated as a grantor trust, which closes the trust route that works against some state income taxes.
The constitutional question the tax survived
Washington's constitution does not mention an income tax. The obstacle is doctrinal. Article VII, section 1 requires that all taxes be uniform upon the same class of property, article VII, section 2 limits aggregate property tax levies to 1 percent of true and fair value, and since Culliton v. Chase, 174 Wash. 363, 25 P.2d 81 (1933), the Washington Supreme Court has treated income as property. A graduated or high-rate tax on income therefore runs into both the uniformity requirement and the 1 percent ceiling.
The legislature enacted the capital gains tax in chapter 196, Laws of 2021, and drafted it as an excise on the act of selling rather than a levy on the gain. In Quinn v. State, decided March 24, 2023, the Washington Supreme Court accepted that characterization. The majority held that the tax is appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves, and that as an excise it is not subject to the uniformity and levy requirements of article VII. The court looked to Washington law rather than federal usage to decide what counts as a property tax, distinguished Culliton without overruling it, and also rejected challenges under the state privileges and immunities clause and the federal dormant commerce clause. The Supreme Court of the United States denied certiorari on January 16, 2024, in Quinn v. Washington, No. 23-171.
The political challenge failed as well. Initiative Measure No. 2109, which would have repealed the tax, was rejected at the November 5, 2024 general election, 64.11 percent to 35.89 percent. The legislature cited that margin in chapter 421, Laws of 2025, when it added the 2.90 percent tier. It then went further in chapter 238, Laws of 2026, which imposes a separate 9.90 percent tax on Washington taxable income above a $1,000,000 standard deduction beginning January 1, 2028. That act does not amend chapter 82.87; it coordinates with the capital gains excise through a nonrefundable credit for capital gains tax paid. Whether a tax on income itself can clear Culliton is a question Quinn did not decide, and the capital gains excise stands on its own footing either way.
Allocation: domicile is the planning variable
RCW 82.87.100(1) allocates gain two ways. Gain from tangible personal property is allocated to Washington if the property was located in Washington at the time of the sale, with a backstop that reaches property located in the state during the taxable year or the prior year when the seller was a Washington resident and no other jurisdiction taxed the gain. Gain from intangible personal property, which covers stock, partnership and membership interests, and most of what a founder or investor actually sells, is allocated to Washington if the taxpayer was domiciled in Washington at the time the sale or exchange occurred. Where a Washington taxpayer's gain is also taxed by another jurisdiction on assets located there, RCW 82.87.100(2) allows a nonrefundable credit limited to the lesser of the Washington tax on those assets or the tax actually paid elsewhere, with no carryback or carryforward.
The intangible rule is a pure domicile test on a single date. It does not turn on where the company is incorporated, where it operates, where the buyer sits, or how long the seller has held the shares. Chapter 82.87 does not define domicile, and the 183-day statutory resident test in RCW 82.87.020(11) does not govern intangibles; the question is the ordinary one of where the individual has a true, fixed home and intends to return. That makes the tax the mirror image of California residency work. California planning asks whether an individual has left before a liquidity event; Washington planning asks the same question in both directions. A founder who establishes Washington domicile before selling brings the gain into the Washington base, even if every dollar of value was built elsewhere, and a Washington founder who changes domicile before the sale takes the intangible gain out of it. In each case the answer depends on the facts that establish domicile, not on a declaration, and on where the individual was domiciled on the date the sale or exchange actually occurred.
Practice notes
The return rides on the federal return. Under RCW 82.87.110(1)(a) it is due on the date the federal individual return is due, and RCW 82.87.110(2)(a) requires a copy of the federal return and the schedules bearing on long-term capital gain, including Forms 1099-B and Schedules K-1. A federal extension carries over under RCW 82.87.110(5) if evidence of it reaches the Department by the original due date, but the tax itself is due by the original date regardless of any extension under RCW 82.87.110(3); the Department's practice is an April 15 payment date and an extension request through its online portal. A return filed late draws a penalty of 5 percent of the tax for each month or partial month it remains unfiled, up to 25 percent, under RCW 82.87.110(6)(a), on top of interest and late-payment penalties under chapter 82.32 RCW, and a final federal change must be reflected on an amended Washington return within 90 days or a further penalty applies under RCW 82.87.110(8)(b). Since June 11, 2026, RCW 82.87.115 has allowed payment up to six months before the due date, which gives a seller in a large transaction a way to settle the liability in the year of sale. When a Washington-domiciled founder sells, the analysis starts before signing: confirm domicile on the expected closing date, identify which portions of the gain are real-estate-attributable or otherwise exempt, test the family-owned small business deduction, size the 7 and 9.9 percent tiers, and look through every pass-through and trust in the ownership chain, because the statute does. A founder who intends to change domicile needs that change to be complete, and documented, before the sale occurs, not arranged around it afterward. G&G State Tax Group provides Washington capital gains tax and domicile planning analysis alongside its state and local tax practice.
This article states the law as of September 26, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group, or another state and local tax adviser, to confirm what has changed since this was written and how the rules apply to a specific situation.
This publication is informational in nature and is not, and should not be considered, legal, accounting, tax, or other professional advice for any person or situation. Correct application of tax law depends heavily on the facts and circumstances in each case, and G&G State Tax Group, LLC assumes no liability in connection with the use of this information, and is not obligated to inform any reader of changes in the law or other factors that could affect the information contained herein.