Last-Minute Pointers: WA State Capital Gains Tax
Updated April 11, 2023.
A while back, we wrote that the 7% WA capital gains tax would be due April 18, 2023 and it was best to prepare for that sooner rather than later, which we were helping our clients to do. Now that due date is confirmed. On March 24, the Washington State Supreme Court approved the state’s 7% tax on capital gains over $250,000 per year. This is the first state tax of its type in the US, and the final act for those opposing it would be a hearing before the US Supreme Court, which is not likely to happen for a while, if at all.
For now, any WA resident with realized long-term capital gains over $250,000 in 2022 (excluding real estate and some other exceptions noted below) must pay the tax by this April 18 to avoid penalties and interest. The late payment penalty can be as high as 29% in a couple of months. To avoid the penalty, a taxpayer must properly extend (certify to the state that a federal extension was requested) and make a payment by April 18 that is at least 80% of the amount actually reported on the return.
How to Proceed
Contact your tax advisor to see if the WA cap gains tax applies to you for 2022 and how much is owed.
The new capital gains tax applies to gains above $250,000 from the sale of assets held for at least one year. It applies only to individuals (not companies or most trusts) and it does not apply to most real estate transactions (although it may apply to real estate held through a partnership).
The tax is levied on those who have their primary residence or are domiciled in Washington State and potentially non-residents if they have gains from sales or exchanges of personal property located in Washington. Please see our earlier blog post on why this new tax was proposed, to whom it applies, and the exemptions.
The WA Department of Revenue is continuing to clarify how this tax will be applied, the latest update being April 7. Three important clarifications:
(1) Loss on a sale or exchange that occurred before the tax effective date of Jan. 1, 2022. Such losses CANNOT be used to offset the WA State capital gains tax. You must add back those losses using the Loss carryforward not allocated to Washington line of the tax return.
(2) Charitable Remainder Trust (CRTs). If you have a CRT and have retained the right to change the charitable beneficiaries, the trust will be treated as a “grantor trust” for the Washington tax. All of the trust’s recognized current year gains must be reported by the grantor.
(3) Installment sales. If you are recognizing capital gain on the installment method (you have a gain when the buyer pays you over time) from a sale prior to 2022, the 2022 gain from that sale is excluded.
Paying the Tax
Ask your tax advisor how to proceed. WA State does not have an income tax, so residents must locate (or apply for) a Secure Access Washington User ID through the Secure Access Washington site “My DOR” portal. With the User ID number, you can apply for a Capital Gains Account, which is required to extend a return, file a return, or pay the tax.
Helpful how-to video demonstrating how to set up a Capital Gains Account is here.
Filing for an extension: If you extend your federal income tax return, Washington requires you to submit an extension request certification to the Department of Revenue by April 18, 2023. As part of that request, you can certify that you have applied for a Federal Individual Income Tax Return Extension. You can also separately extend your Washington return.
Information about the capital gains tax is available at the Washington State Department of Revenue website.