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What the Washington State Capital Gains Tax Ruling Means

by | Mar 27, 2023 | Taxes | 0 comments

On March 24, the Washington Supreme Court upheld the state’s capital gains tax as an excise tax, making it legal.

The state legislature passed the capital gains tax in 2021, and Governor Jay Inslee signed it into law. The tax enacted a seven percent capital gains tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments and tangible assets, with exemptions for the first $250,000 each year. The tax excludes gains from sales of real estate, retirement accounts, and certain small businesses.

The ruling means tax filers and their tax professionals will be required to submit their subjected capital gains taxes by the upcoming April 18, 2023, deadline.

Background on the law

Once signed into law, opponents claimed that the tax was an income tax and therefore was not constitutional. A county Superior Court Judge agreed with opponents last March.

Supporters of the tax contend the capital gains tax is an excise tax on a good or service and not an income or property tax. The state Supreme Court agreed in its 7-2 ruling.

What it means for taxpayers

With exemptions set for up to $250,000 each year, this tax is expected to affect fewer than 1 in every 1,000 residents. The tax only applies to individuals, and those affected – roughly 7,000 or fewer – must pay the tax.

  • If you already filed your 2022 taxes: and you have capital gains of more than $250,000, other than from the sale of real estate, retirement accounts, and certain small business exemptions, contact your tax professional. Be aware that this specific capital gains tax may require an additional Washington State tax return to be filed.
  • If you haven’t filed your 2022 taxes: and you have questions on your eligibility for the tax, consult with your tax professional.

Individuals who receive a filing extension for their federal income tax return are entitled to the same filing extension for their capital gains tax return. However, a filing extension does not extend the due date for paying the capital gains tax due so penalties and interest will apply to late payments.

Online resources

If you’d like more information on how to file a return, make a payment or otherwise, please consult these online services from the Washington State Department of Revenue.

Questions or concerns?

We’re here to help you have the information and perspective you need for your specific financial picture. If you have questions or if you’d like to review your situation, please contact your tax preparer or financial planner.