Capital Gains Tax in Washington State: Updates & How They Could Affect You
If you work in Washington state, you might be familiar with the changes to capital gains taxes over the last few years and the new 7% capital gains tax on the sale or exchange of long-term assets including stocks, bonds, and other types of assets and investments.
The state legislature had been attempting to pass a capital gains tax for roughly a decade; supporters claim the new tax will make Washington’s tax system more equitable, especially since the state has no income tax. The money collected will be primarily used to support a bill known as “The Fair Start For Kids Act,” which focuses on schools, early learning, and child care programs as well as school construction and renovations.
On Jan. 1, 2022, the state’s capital gains tax officially became active.
This is particularly relevant to tech employees who receive restricted stock units (RSUs) as part of their compensation package. If you work for a Washington-based employer like Microsoft or Amazon, the RSU tax rate in Washington is a big deal! It may impact when and how you decide to sell these shares to make the most of your compensation.
What do you need to know about this tax, and how can you make the most of the situation? Let's dive into a full history of the Washington capital gains tax, where it stands now, and how it stands to affect you and your portfolio.
A Timeline of the WA Capital Gains Tax
May 4, 2021 - Washington Governor Jay Inslee signs legislation ESSB 5096, which enacts a capital gains tax equal to 7% of a Washington resident’s adjusted long-term capital gains.
January 1, 2022 - The new capital gains tax in Washington goes into effect.
March 1, 2022 - Quinn vs. State of Washington brings about the question of whether the implementation of the new capital gains tax is constitutional. The Douglas County Superior Court rules the new capital gains tax as unconstitutional, rendering it invalid.
November 30, 2022 - The Washington State Supreme Court allows the Washington Attorney General’s Office to enforce and collect the capital gains tax while the case is being reviewed.
March 2023 - The Washington State Supreme Court upholds the capital gains tax in a 7-2 ruling, deeming it constitutional as an excise tax.
May 2024 - Initiative 2109, which was on Washington’s November 2024 ballot, aimed to repeal the capital gains tax. The repeal failed, leaving the capital gains tax in place.
What is the Current Washington Capital Gains Tax?
The capital gains tax in Washington state is a 7% tax on profits from the sale of long-term assets (owned for over a year before selling them) over $262k.
To be clear, this is NOT $262k of stock sales, it's $262k of long-term capital gains. You could sell $750k of XYZ stock and only realize $100k in gains. In that example, you would not pay the additional 7% tax back to Washington state.
This cutoff point of $262k won’t remain static; this is just the standard deduction for 2023, and it will rise each year to match the inflation rate (the 2024 deduction has not yet been announced).
It’s important to clarify that the tax doesn’t apply to every sale of long-term assets. To name one example, real estate sales are exempt. Click here to see a full list of exemptions from the tax.
In addition to the Washington capital gains tax, there’s also a federal long-term capital gains tax, which is 15% or 20% for most taxpayers depending on their annual income. Remember that you'll also pay a 3.8% Net Investment Income Tax (NIIT), aka Obamacare tax, on capital gains if you make over $250k/yr married filing jointly ($200k/yr if single).
How It Works:
As a Washington taxpayer, imagine you sell $300k of capital gains in 2023. Not $300k of money, $300k of gains.
For the first $262k, you’ll pay tax at the federal level. As of 2024, this is currently at 15-20% plus the 3.8% NIIT for the Affordable Care Act, depending on your taxable income.
For the next $38k, you’ll pay tax at the federal level AND an additional 7% tax back to Washington state.
Who is Affected by the new WA Capital Gains Tax?
So far, you’ve had a chance to learn about the bad news. The good news is that the new capital gains tax won’t directly impact the vast majority of Washington taxpayers.
In fact, Washington’s Department of Revenue estimated that roughly 0.2% of all taxpayers in the state–or about 7,000 individual taxpayers–would actually need to pay this tax.
Along with the previously-mentioned $262k threshold, there are quite a few noteworthy exceptions to the tax:
Retirement accounts
Real estate sales
Interests in a privately held entity where capital gain/loss is directly attributed to real estate
Family-owned businesses making no more than $10,000,000/year
Commercial fishing privileges
Profits from selling timber/livestock used in ranching or farming
Timber, timberland, and dividends and distributions for REITs derived from the sale or exchange of these properties
Despite these exceptions, the state collected $786 million from the capital gains tax in 2023. Overall, there were around 3,000 payments in each of the years the tax has been active (2022 and 2023). This was enough to fund the state’s goal: depositing up to $500 million a year from the tax in a state account for schools, early learning, and childcare programs, with the remainder going toward paying for school construction and renovations.
What We Recommend
Since the first round of capital gains tax payments in Washington state were due on sales made in 2022, it’s hardly surprising that many stockholders, executives, and people who have a large concentrated stock position chose to sell large capital gains prior to December 31, 2021.
Among them was Satya Nadella, CEO of Microsoft: in 2021, he sold 50% of his stake in the corporation and divested around 840,000 shares, earning more than $285 million in the process. And yep, he'll still pay 20% capital gains + 3.8% NIIT to the Feds on that. A cool $68 million bucks.
However, selling off long-term assets may not be the right move for your own financial plan strategy. Since the capital gains tax will affect just a fraction of Washington state’s taxpayers, it’s crucial to make sure the tax will actually impact you before making any rash decisions.
With that said, we feel this situation is very plannable with the right tax strategies for high-income earners. Most of our clients aren’t realizing $262k of long-term capital gains in a calendar year to begin with, and if they do need a larger sum of cash for a down payment, etc., they are typically able to source that cash by staying under $262k of gains by selling from multiple accounts or multiple positions.
If you find that you will owe, here are a few common strategies for mitigating the tax’s impact:
Concentrated Stock Positions
If you have a concentrated stock position with a very large long-term capital gain, you could consider a selling strategy over multiple years to stay under the $262k threshold. If you’re in need of an amount of cash that would put you over this $262k threshold, securities loans can be a great option.
If your concentrated position has gotten too large and it’s keeping you up at night, it might be time to rip off the Band-Aid and sell to get back to your comfort level. As we like to say, “Don’t let the tax tail wag the investment dog.”
And remember, selling newly vested/purchased shares may be more tax-efficient than selling your oldest shares because the overall gain is less! Feel free to reach out to us as we may have some ideas to help you tie a selling strategy into your overall planning objectives.
Tax-Loss Harvesting
If you don't know what tax-loss harvesting is, take a moment to review on Nerdwallet. Higher-level strategies like tax-advantaged direct indexing just got more valuable, too.
The new 7% Washington State capital gains tax applies only to the sale of long-term assets, assets that are held for more than one year. Because of this, only the sale of long-term losses can offset long-term gains, for the purposes of calculating the tax owed.
Example 1: You sell $500,000 of XYZ stock, realizing $300,000 of long-term capital gains. You also sell $300,000 of ABC stock, realizing $75,000 of long-term losses.
Your net long-term capital gain for the year is $225,000 ($300k-$75k). Since this is under the $262,000 threshold, you will not owe the 7% tax to Washington State (but you’ll still owe taxes at the federal level).
Example 2: You sell $500,000 of XYZ stock, realizing $300,000 of long-term capital gains. You also sell $300,000 of ABC stock, but this time, realizing $25,000 of long-term losses.
Your net long-term capital gain for the year is $275,000 ($300k-$25k). You will owe 7% on 25k (the amount over 262k) to Washington State. In addition, you will owe taxes at the Federal level on the entire 275k long-term capital gain.
Note that the ability to net losses against gains is different from the Federal capital gains tax rules, which allow you to net out short-term losses against short-term gains, long-term losses against long-term gains, and then take the net against the net.
Tax Credits
Some tax credits can also offset your overall cost:
Business and Occupation tax credit due on the sale or exchange subject to the capital gains tax
Capital gains tax credit for legally imposed income or excise tax paid to another taxing jurisdiction on the capital gains from the assets in another jurisdiction, to the extent that these gains are included in the state’s capital gains tax
Charitable Giving
Would you rather your money go to a cause you support instead of the government? You’re in luck because charitable giving can be another viable option to avoid Washington state’s capital gains tax.
If you sold these assets and gave cash to a nonprofit, you would have to realize the capital gain and pay taxes. However, donating the asset itself to the nonprofit avoids the capital gains tax entirely. Most often, this is done through a charitable vehicle such as a donor-advised fund or charitable remainder trust.
The charity doesn’t pay tax on the assets they receive from you, either. This makes stock donations a valuable option for your tax bill AND any causes or organizations that you care about.
Check out our video on Donor-Advised Funds for more information.
Stay Up-to-Date on Changes
Whether you’re considering adjustments in response to Washington’s capital gains tax or any other large-scale financial decision, avoid the temptation to act too quickly. Impulsive moves may feel smart at the time, but they may not be a good fit with your long-term investment goals. The most crucial step you can take is to consult your trusted wealth advisor and tax advisor first.
“Trusted” is the operative word here. Too many wealth advisors fail to take their clients’ best interests into account or muddle their advice with industry jargon that sounds impressive but makes meaningful communication practically impossible. Fortunately, Consilio Wealth Advisors can give you reliable, easily understandable recommendations created with your own financial situation in mind.
Contact us today to schedule a call and start securing your financial future!
Disclosures
The information provided in this article is for educational and informational purposes only and does not constitute investment advice and should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Consilio Wealth Advisors, LLC ("CWA") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.
