Capital Gains Tax for Individuals in Washington State
As of January 1, 2022, Washington imposes a state tax on long-term capital gains. If you report long-term gains on your federal income tax, you may need to file an individual return in Washington State if your gains are over a certain threshold. The rules are complicated and highly subject to misinterpretation.
To get help and guidance now, contact us at Seattle Legal Services. We specialize in helping individuals and businesses navigate complex IRS and Washington State tax problems, and we can answer your questions and concerns about the state’s new capital gains tax.
What Is the Capital Gains Tax in Washington?
The WA DOR assesses a capital gains tax of 7% on certain long-term gains over $250,000. The threshold is tied to inflation, and as of tax year 2023, it’s $262,000.
For example, if you have $362,000 of capital gains allocated to Washington State, you will face WA capital gains tax on $100,000, creating a tax liability of $7,000.
Who Needs to Pay and File Capital Gains Returns in Washington?
The state’s capital gains tax applies to individuals and individuals who receive capital gains through a pass-through or disregarded entity.
For example, if you incur gains selling stocks, you may need to pay capital gains tax in Washington. Similarly, if you have a stake in an S-corp that has a capital gain, you may need to file a capital gains return in Washington. In contrast, a C-corporation that has capital gains in Washington State does not need to file this return.
As of tax year 2023, you must report long-term gains over $262,000 if any of the following apply:
- You have long-term gains from selling tangible assets and you were domiciled in Washington at the time of the sale.
- You have long-term gains from selling tangible personal property located in Washington State.
- You have long-term gains from selling tangible property that wasn’t located in state, but the following three statements are true: 1) You were a WA resident at the time of the sale, 2) the property was located in Washington the year of the sale or the previous year, and 3) the sale is not subject to income/excise tax from another revenue agency.
Types of Assets Subject to Washington’s Capital Gains Tax
The state’s capital gains tax does not apply to real estate or the other exempt assets outlined below. Instead, it applies to tangible and intangible personal property allocated to the state of Washington, but the reporting requirements differ for these two types of assets:
Intangible personal property includes stocks, bonds, copyrights, trademarks, goodwill, etc., and these gains are subject to capital tax if the individual is domiciled in Washington at the time of the sale.
Tangible personal property includes arts and collectibles, and gains are allocated to Washington if the property was located in the state at the time of the sale. If the sale was not in Washington State, the gains are allocated to the state if the following all apply:
- You were a Washington resident at the time of the sale.
- The property was located in Washington at some other point during the current year or the year before the sale took place.
- the sale was not subject to income or excise tax in another jurisdiction.
To give you an example, imagine that you sell stocks for a significant capital gain. At the time of the sale, you are abroad for several months, but your permanent domicile is in Washington. Then, if the gains are over the reporting threshold, you must pay tax.
Here’s another example, Say that you sold a collectible car for a significant profit. The sale took place out of state, but you are a Washington resident and the car was stored in state prior to the sale. Then, as long as the gains aren’t subject to capital gains tax in another state, you will owe Washington’s capital gains tax if your gains are over the threshold.
Are you a Washington resident for tax purposes?
You are considered to be a WA resident for tax purposes if you are domiciled in Washington State. Although the law does not define this term, it refers to your permanent home, and it can get tricky if you have homes in multiple states. However, if you have no permanent place of abode in the state and you spent 30 or fewer days in the state, you are not considered to be domiciled in Washington.
In contrast, imagine that you spend the year traveling around the world, but you have a permanent home in Washington and you plan to return there when your travels have concluded. In this case, you may also be considered domiciled in Washington and thus a resident for tax purposes.
Even if you are not domiciled in the state, you are considered a resident if you maintained a place of abode in the state and were physically present for at least 184 days. For example, say that you have a vacation home in Washington, but for tax purposes, your domicile is New York State. If you spent 200 days in the state, you are over the 183-day threshold and thus considered to be a resident.
Exemptions from Washington State Capital Gains Tax
The state’s capital gains tax does not apply to gains from sales of the following assets:
- Short-term capital assets.
- Real estate.
- Long-term gains related to real estate sales through a pass-through entity.
- Assets held in certain retirement accounts and employee benefit plans.
- Assets under imminent threat of condemnation.
- Depreciable property under IRS Sec 1679a)(1) or property that qualifies for a Section 179 deduction.
- Timber, timberland, or capital gains received as dividends or distributions from real estate investment trusts (REIT).
- Goodwill from the sale of an automobile dealership.
- Commercial fishing privileges.
- Cattle, horses, or breeding livestock if more than 50% of your gross income for the tax year (including capital gains) is from farming or ranching.
What is a qualified family-owned business?
For the sake of the capital gains exemption, you can qualify for a deduction on the sale of a family-owned business if the following apply:
- You had a qualifying interest for at least five years preceding the sale or transfer of the business.
- You or your family members materially participated in the operation of the business for at least five of the last 10 years. This requirement does not apply if you made the sale to a qualifying heir.
- The business’s worldwide revenue was $10 million or less in the 12-month period preceding the sale.
Deductions and Credits
The DOR lets you offset capital gains with the following exemptions and deductions:
- $262,000 standard deduction for 2023 – this number increases annually based on inflation.
- Long-term gains from the sale of a qualified family-owned small business.
- Charitable donations in excess of $262,000, up to $105,000 – these numbers also increase annually with inflation.
The DOR also provides a credit for B&O taxes due on the same sale as well as a credit for income or excise taxes paid to another taxing jurisdiction on the same capital gains.
Can you claim a deduction for short-term losses?
No. Although the IRS allows you to deduct short-term losses from your long-term capital gains, Washington State does not allow this. You will not report short-term gains on your state capital gains return, but you will also not use any short-term losses to offset your tax liability.
How to Report Capital Gains in Washington
To report your capital gains, you must set up a SecureAccess Washington (SAW) account with the DOR so that you can file your return online. To file, sign in to your SAW account and select Log in to My DOR. Select Get Started on the Services page, and then look for File Return on the Capital Gains Return panel.
The online WA capital gains return will ask you for the following information:
- Net federal long-term capital gains and losses.
- Total of gains/losses not allocated to Washington.
- Loss carryforward not allocated to Washington.
- Long-term gains allocated to Washington.
To find these numbers, look at Schedule D and Form 8949 of your federal income tax return. If you’re unsure of what to report or where the gains are allocated, consult with a tax preparer who has experience with the Washington DOR.
You will also need to note the following details about the capital gains that are allocated to Washington State. You will need to note these numbers for each item that was allocated to Washington State.
- Description of the asset.
- Proceeds (sale price)
- Cost basis
- Long-term capital gains allocated to Washington
- Exemption amounts
The total of all of these items should be equal to the amount of capital gains that were allocated to Washington State. You will also be prompted to enter charitable donations made to WA-based charities, and the application will calculate your tax deduction based on your entries.
If you have capital gains from the sale of a qualified family-owned small business, you may also be able to claim a deduction, but you must answer questions about your interest in the business, the business’s revenue, and whether or not you materially participated.
In the “Other Deductions” section, you should enter taxes paid to other jurisdictions. You can enter the amounts manually or upload returns that you filed in other jurisdictions. You will also need to note the description of the asset along with the tax paid and the state or territory to which it was paid.
If you are filing late, you will see a Return Totals page which shows your tax due as well as penalties and interest. You can apply for a penalty waiver in the online application at the same time as you file. Simply, follow the yes-no prompts and then enter a written explanation of why you filed late.
Finally, once you’ve entered everything, the program will ask for documents to support the information on your return, and you will upload the requested documents. If you cannot upload your federal income tax return, you can note that and mail the Department a copy.
How to Pay Capital Gains Tax in Washington
When you file a capital gains return online as explained above, you can also make your payment online. The DOR accepts ACH debits which you can set up online, or you can contact your bank to initiate an ACH credit to the department. You may also pay with a credit or debit card, but that’s subject to a 3.25% processing fee.
If you don’t want to pay when you file, you can submit the return without payment, but remember that if you pay late, you will incur interest on the balance. You cannot mail the Department a payment for capital gains tax. You must pay online.
Due Dates and Extensions for WA Capital Gains Returns
WA DOR Capital Gains tax returns are due April 15 or the following business day if that date falls on a weekend or holiday. If you request an extension on your federal income tax return, you automatically receive an extension on your state return, but you must sign into your online account and notify the Department about the extension before the April deadline. The extended deadline is October 15th or the next business day if applicable.
Note that even if you extend, your payment is still due on April 15th. If you pay when you file your return, you will also owe interest and late payment penalties. To avoid that, you may want to sign into your online account and make a payment before you file.
Penalties for Filing Late or Not Reporting Gains
The DOR assesses a 9% penalty for late tax payments. The penalty increases to 19% on the last day of the first month after the due date, and it increases to 29% on the last day of the second month following the due date.
If you report less than 80% of the tax due, you may also face an understatement penalty of 5% of the unreported tax. If you don’t pay the tax by the due date, the penalty increases to 15%. If you haven’t paid by the 30th day following the due date, the penalty increases to 25%.
You will also incur interest on any late payments.
Resolution Options if You Cannot Pay
To reduce your total bill, consider requesting penalty relief if applicable. You can do this through the DOR’s website when you file your return, or you can hire a tax attorney to request penalty relief for you.
If you cannot pay your capital gains tax, you may want to request an installment agreement through the DOR. Generally, if you can pay the total due within 12 months, you can set up a payment plan online. Otherwise, you will need to talk with a DOR employee, and they approve payment plans on a case-by-case basis.
The DOR occasionally settles taxes through Rule 100 settlements. This means that the agency accepts less than owed on the tax bill, but only in cases, where the taxpayer proves that they cannot pay the bill. A settlement is very unlikely for taxpayers who face the state’s capital gains tax.
Frequently Asked Questions (FAQs)
What is Washington’s capital gains tax rate?
As of 2024, the capital gains tax rate is 7% on gains from qualifying asset transfers over the exemption of $262,000.
Who is exempt from Washington capital gains tax?
You are exempt if the gains arise from exempt property such as real estate. You are also exempt if your gains are under the $262,000 threshold as of 2023 and indexed to inflation. You are also except if you are not domiciled in the state or a resident of the state.
Are retirement accounts subject to Washington’s capital gains tax?
Gains earned in qualifying retirement accounts are not subject to this tax. For example, if you sell stocks in your IRA, you do not have to consider those gains when determining if you owe capital gains tax.
Are distributions from mutual funds subject to Washington’s capital gains tax?
If the distributions are based on the sale of intangible assets held for a year or more, they may be subject to capital gains tax if your total capital gains are over the threshold. However, most mutual fund distributions tend to be interest or dividends which are not considered to be capital gains.
Are gains from cryptocurrency subject to state capital gains tax?
Because crypto is an intangible asset, you will be subject to the state’s capital gains tax if your total long-term gains are over the threshold. However, if you are under the threshold or only dealing with short-term crypto gains, you don’t need to worry about reporting the crypto.
Can I deduct charitable donations from my capital gains tax in Washington?
As of 2024, you can deduct up to $105,000 in charitable donations over $262,000. These numbers increase annually based on inflation.
For example, say that you donated $362,000 to qualifying charities. You can claim $100,000 as a deduction against your taxable capital gains. That is the amount of your donation minus the exemption.
However, if you donate $400,000, you can only claim an exemption of $105,000. Although your donation exceeds the exemption by $138,000, you are only able to claim up to $105,000 as a deduction on your capital gains return.
How does Washington’s capital gains tax compare to the federal capital gains tax?
Washington’s capital gains tax is significantly different than the IRS’s capital gains tax. The WA state tax has more exemptions, and it applies at a flat rate once you are over the exempt amount. The federal capital gains tax applies to all capital gains at a rate ranging from 0 to 20%, depending on the taxpayer’s total income.
Why You Should Contact a Professional
The state capital gains tax is still relatively new, and at the time of writing it continues to face legal challenges which may lead to changes in the law. These rules can be incredibly complex for individuals, and a misstep can lead to overpaying taxes or underpaying and incurring penalties.
To protect yourself, you should work with a tax attorney based in Washington who has experience dealing with DOR and the state’s unique tax code. If you’re currently facing a state tax audit, dealing with penalties, worried about unreported capital gains, or not sure if you need to file, you should reach out to a tax attorney today.
At Seattle Legal Services, we focus on helping individuals and businesses deal with federal and state taxes. To get help now, contact us for a consultation today.