We are starting to include the new WA State capital gains tax in the guidance we provide on a variety of transactions – from RSUs and equity comp to business sales and transfers.
In May 2021, Governor Jay Inslee signed the new capital gains into law, after it passed the WA State Senate by just one vote (25 to 24). The money raised, an estimated $400+ million annually, will be used to fund K-12 education, including early learning and childcare. Unprecedented and controversial, the new capital gains tax is being challenged in the courts, and there is a chance it could be overturned by the time the first payments are due.
For planning purposes, it’s important to know what types of transactions this new tax would apply to, at what level and when:
WHAT: Flat 7% rate on long-term capital gains (assets held for at least 12 months). There is a $250,000 annual exemption for both singles and couples filing jointly.
WHEN: Starting January 1, 2022, with taxes due April 15, 2023.
ON WHOM: People whose primary residence is in Washington State AND anyone who has gained from the sale of tangible personal property located in Washington (excluding real estate).
WHAT IS EXEMPT: Gains from the sale of a wide variety of assets:
- Real estate – including distributions from privately held entities if the gain is from directly owned real estate
- Investments within retirement accounts (IRAs, Roth IRAs, 401ks, etc.)
- Business transactions that do not generate capital gains or are taxable as income, including tax-free mergers, transfers to partnerships, and gains from sales of qualified small business stock
- Family-owned small businesses with less than $10 million in annual revenue
- Certain business assets that can be depreciated or expensed
- Commercial fishing rights; timber and timberlands, including dividends and distributions from REITS (real estate investment trusts) derived from the sale or exchange of timber or timberlands
- Eminent domain transactions (private property sold for public use)
- The amount attributed to goodwill in the sale of a franchised auto dealership
NOTE: There is a limited charitable deduction for donations to WA State charities.
WHAT ABOUT TRUSTS? Trusts do not pay the tax. But any trust gains reported by the beneficiaries are subject to the new tax. A similar rule applies to partnerships, LCCs and other pass-through entities: the owners pay the new tax on their share of gains.
We are keeping a close eye on developments regarding the new WA State capital gains tax. As of now, we are generally advising clients not to make financial or life decisions based solely on avoiding this tax.
More on taxes: Coming in 2022: New WA State Payroll Tax