December 6, 2024
Washington Capital Gains Tax: A Holistic Tax Strategy Approach
Washington State’s capital gains tax, enacted through Senate Bill 5096 (RCW 82.87) and signed into law by Governor Jay Inslee on May 4, 2021, introduced a 7% excise tax on long-term capital assets, including stocks, bonds, cryptocurrency, business interests, and other investments or tangible assets. Despite challenges, Washington voters upheld the tax by rejecting Initiative 2109 on November 5, 2024.
This tax primarily affects individuals, including those with ownership stakes in pass-through or disregarded entities that engage in the sale or exchange of capital assets. Importantly, it applies to capital gains allocated to Washington state.
Determining Washington Residency
The capital gains tax applies mainly to individuals who are considered “domiciled” in Washington during the taxable year. Nonresidents may also be subject to the tax unless they meet certain criteria, such as:
- Maintaining no permanent place of abode in Washington during the taxable year, or
- Spending no more than 30 days in Washington while maintaining a permanent residence outside the state.
Additionally, for taxation of tangible personal property, Washington considers individuals who meet the statutory residency test: those who may not be domiciled in Washington but have a place of abode in the state and were physically present for over 183 days during the taxable year.
Exemptions and Deductions
Exemptions:
Certain assets and transactions are excluded from the capital gains tax:
- Real estate, including property held directly or through a privately held entity.
- Assets held in specific retirement accounts.
- Gains from assets subject to condemnation or those sold under threat of condemnation.
- Certain livestock tied to farming or ranching activities.
- Assets used in a trade or business to the extent those assets are depreciable under Title 26 U.S.C. Sec. 167(a)(1) of the internal revenue code or qualify for expensing under Title 26 U.S.C. Sec. 179 of the internal revenue code.
- Timber and timberlands, including dividends or distributions from real estate investment trusts (REITs) that derive from timber sales.
- Commercial fishing privileges and goodwill from the sale of a franchised auto dealership.
Deductions for 2024:
- The standard deductionis $270,000.
- Charitable donations exceeding $270,000 are subject to a cap of $108,000 per individual per year for the charitable deduction, applicable to those who have primarily directed or managed within the state of Washington.
- Gains from the sale of all or substantially all of a qualified family-owned small business are deductible.
Taxable Events
Tangible Personal Property:
Capital gains or losses from the sale of tangible personal property are subject to Washington state tax if the property was located in Washington at the time of the transaction. Additionally, even if the property wasn’t in Washington at the time of sale, gains or losses can still be taxed if the following conditions are met:
- The taxpayer is a resident at the time of the sale.
- The property was located in Washington during the taxable year of the sale or the immediately preceding year.
- The taxpayer is not subject to similar taxes in another jurisdiction.
Intangible Personal Property:
Capital gains or losses from the sale of intangible personal property, such as stocks, are taxable in Washington if the taxpayer was domiciled in the state at the time of the transaction.
Comprehensive Planning Considerations
To effectively navigate Washington’s capital gains tax, it’s essential to consider both short-term and long-term tax strategies. This involves understanding the exemptions available, utilizing estate planning strategies to minimize taxable gains, and focusing on investment and business ownership structures that maximize tax efficiency.
If you need assistance with your tax planning strategy, please reach out to your dedicated GO contact for personalized advice.
Writer: Diem Bui, CPA, EA, MBA – Tax Manager
Editor: Stacy Rose, CPA – Senior Tax Manager
References
https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax
https://www.pwc.com/us/en/services/tax/library/washington-enacts-capital-gains-tax.html