Washington State Governor Signs into Law Excise Tax on Certain Capital Gain Income

May 6, 2021 | Article

On May 4, 2021, Washington State Governor Jay Inslee signed into law a new excise tax on gains from the sale or exchange of certain capital assets. Generally, this new legislation imposes a 7% tax on the net annual amount of long-term gains from the sale or exchange of stocks, bonds, and other capital assets in excess of $250,000 (for both single and married filing joint filers). The legislation states this new revenue will be used to fund certain K-12 education, early learning, and childcare programs.

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There are numerous exemptions (meaning gain from the sale of certain capital assets is not subject to this new tax), including gains from the sale of:

  • Certain real property
  • Interests in an entity if that entity holds certain real property
  • Retirement account assets
  • A taxpayer’s interest in a “qualified family-owned small business” (as defined in the legislation, but generally businesses with less than $10 million in annual revenue)
  • Livestock

Long term capital gains or losses derived from the sale of intangible personal property are allocated to Washington state and subject to the tax if the taxpayer was domiciled in Washington at the time the sale or exchange occurred. But gain from the sale of goodwill associated with certain auto dealerships is exempt.

Gain from the sale of tangible personal property is allocated to Washington state if the property is located in the state. Gain from the sale of tangible personal property not located in Washington state at the time of sale can still be allocated to Washington state if the property was located in Washington state at any time during the taxable year, the taxpayer was a Washington state resident at the time of the sale or exchange, and the gain is not subject to tax from another taxing jurisdiction. A credit is allowed against the B&O tax for any excise tax owed from the same sale.

Only individual Washington state residents are generally subject to this new tax. This includes individuals allocated a share of long-term capital gain from a pass-through or disregarded entity, such as a partnership, S corporation, grantor trust, or limited liability company taxed as one of the former. Taxpayers owing tax under this new legislation will be subject to a new tax filing regime with the Washington State Department of Revenue.

What’s Next for the Washington State Excise Tax?

This new legislation is currently scheduled to be effective on January 1, 2022. However, because the Washington state constitution bars any type of income taxes, lawsuits challenging the legality of this new legislation have already been filed and could delay implementation. Proponents of this new legislation classify it as an “excise tax” on gains from the sale of capital assets and thus claim it is not an income tax. Ultimately, courts may decide whether this new legislation accords with the Washington state constitution.

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