Joe's take
You bought into a late-stage private company on the secondary market. Or you exercised options at a company that was already past $50 million in gross assets. Or you got RSUs that vested after the company was already a unicorn. Whatever the path, §1202 isn't available to you. The federal QSBS exclusion that founders and seed-stage employees get? Off the table.
You're holding a fully taxable position. And starting January 1, 2028, Washington's tax environment for high earners gets meaningfully worse.
If you're an early employee or investor at one of the big late-stage names — Stripe, Databricks, OpenAI, Anthropic, SpaceX, Canva, Discord, Ramp, take your pick — and you're sitting on a position that's grown into the eight or nine figures, this post is for you. For many holders in your position, the next two years are the most important state tax planning window you will ever get.
To put numbers on it: a $200 million liquidity event leaves roughly $150 million invested. At a 4–6% yield, that's $6–9 million of annual investment income. 9.9% on the portion above $1 million is real seven-figure annual tax — every year, for the rest of your life as a Washington resident. The state tax cost of being a Washington resident at this scale isn't a one-time hit on the sale. It's a permanent annual drag.
Here's what most people in this situation get wrong. They look at the 2028 effective date, conclude they have time, and wait. Some of the most valuable structural moves require 12 to 24 months of lead time to execute properly. By the time a tender or IPO is on the calendar, the highest-value planning windows have already closed. If you're not structurally set up by 2027, most of the moves below will be functionally unavailable.
After 25 years of advising founders and high earners through major tax events, I can tell you: the people who do well in moments like this are the ones who plan before the liquidity event, not after.
This post walks through what's actually changing, and what to do about it. None of it is legal advice for your specific facts. But it's how I think about the problem.
Why §1202 isn't your answer
Quick housekeeping for readers wondering whether they should be looking at QSBS.
Section 1202 requires that the stock be acquired at original issuance from the company — meaning, you bought it directly from the company, not from another shareholder. Stock you bought on the secondary market generally isn't QSBS in your hands.
Stock acquired from option exercises is potentially QSBS — if the company qualified as a small business at the time the options were granted (gross assets under $50 million, among other tests). For most late-stage company employees, the company was already well past that threshold by the time you got there.
RSUs are worse. RSUs aren't "stock" for §1202 purposes until they vest, and by the time they vest at a unicorn, the company is far past the gross-assets cap.
§1045 rollover doesn't help either, because §1045 only works to defer or preserve QSBS treatment on stock that was QSBS to begin with.
If you do happen to hold some QSBS-eligible stock alongside the bigger non-qualifying position — early angel investments, or a co-founded company on the side — the rules are very different and the planning is different. That's a separate conversation.
For everyone else: you're working with fully taxable long-term capital gain.
What's actually changing on January 1, 2028 — and what isn't
Read this section carefully, because the conventional framing of "sell before 2028 to avoid 9.9% Washington tax" is overstated, and acting on the wrong version of the urgency leads to wrong decisions.
The capital gains tax is already here. Washington's capital gains excise tax has been in force since 2022. SB 5813, signed in 2025, added a tiered rate structure: 7% on long-term capital gains above the standard deduction (~$262K, indexed) up to $1 million, and 9.9% on gains above $1 million. The 9.9% rate on capital gains above $1 million is already in effect — has been since January 1, 2025.
So if you sell your private company stock today, you already pay 9.9% Washington tax on the portion of the gain above $1 million.
ESSB 6346 doesn't pile on top of that for capital gains. The new income tax provides a credit for Washington capital gains tax already paid, specifically to prevent double taxation. For pure long-term capital gain on appreciated stock, the post-2028 environment isn't dramatically different from today.
What ESSB 6346 actually changes is everything else. Starting January 1, 2028, Washington imposes 9.9% on Washington taxable income above $1 million per household. The base is federal AGI. That captures wages, bonuses, ordinary-income compensation events (including the income piece of RSU vesting and certain option exercises), business income, partnership distributions, interest, dividends, and short-term gains. None of that is reached by the existing capital gains tax. All of it gets caught by ESSB 6346.
For someone holding nine figures of private company stock, the practical impact looks like this:
- The embedded long-term capital gain on the stock itself: roughly the same tax burden 2027 vs 2029 (9.9% above $1M either way, with the credit mechanism handling the interaction).
- Any wages, bonus, or ordinary-income comp above $1 million: not taxed at the state level today, taxed at 9.9% starting January 1, 2028.
- The income piece of an RSU vesting cliff at IPO: not taxed at the state level today, taxed at 9.9% starting 2028.
- Business income or partnership distributions above $1 million: not taxed today, taxed at 9.9% starting 2028.
- Investment income above $1 million on the proceeds after a sale (interest, dividends, short-term gains): not taxed today, taxed at 9.9% starting 2028.
That last point matters more than people realize. Run the numbers. After a $200 million liquidity event with $150 million invested at a 4-6% yield, you're generating $6-9 million of annual investment income. 9.9% on the portion above $1 million is real seven-figure annual tax, every year, for the rest of your life as a Washington resident.
That's the actual reason the planning window matters. The tax cost of being a Washington resident at this scale isn't a one-time hit on the sale. It's a permanent annual drag on every dollar of post-sale investment income above the threshold.
Move 1: Change your domicile — and meet the 30-day safe harbor
This was a marginal move for many high earners under just the capital gains tax. ESSB 6346 changes the math.
If you were on the fence about leaving Washington, the new income tax is the thing that tips it. But "leaving Washington" isn't a vibe — it's a specific legal test. The operational standard you have to meet is Washington's 30-day safe harbor for domiciliaries.
There are three prongs, and you must satisfy all three for the entire tax year:
- No permanent place of abode in Washington at any time during the year. Not a Seattle condo. Not a vacation home you keep year-round. Not a room in a family member's house that's continuously available to you.
- A maintained permanent place of abode outside Washington for the entire year. Real home, real lease or deed, real utilities.
- 30 days or fewer in Washington during the year. Partial days count as full days. An early morning departure, an afternoon meeting, an overnight layover — each counts as a full day.
Fail any one prong and the safe harbor is unavailable. You remain a Washington resident, taxed on worldwide income, for the entire year.
The most common failure mode isn't day count — it's the abode prong. Many would-be movers buy a home in Nevada, update the driver's license, and keep their Seattle condo "for visits." Even spending only 10 days a year here, they fail the safe harbor because they still maintain a Washington place of abode. If you keep a Washington residence, the strategy usually fails — regardless of how few days you spend here.
For ESSB 6346 specifically, to qualify for the 2028 tax year, all three prongs must hold for the entire 2028 calendar year. Translation: you need to be fully out — Washington abode given up, non-Washington permanent abode established — before January 1, 2028. From today (mid-2026), that's roughly 19 months. Realistically, you want to be set up by mid-2027 so the change has a documented, defensible track record before the tax year that matters.
I have a separate post that walks through the 30-day rule, the three prongs, and the most common planning mistakes in detail. And a separate post on what a real domicile change looks like in practice.
A few things worth knowing about the move itself.
Washington will look at where your life actually is — not where you say it is. A defending state with two new tax regimes will scrutinize claims aggressively. Expect the audit playbook used by other states (New York, California) to migrate here quickly. Documentation matters: travel logs, lease and utility records, banking and registration history.
Even after you've established a new domicile, Washington can still tax you on Washington-source income — partnership distributions tied to a Washington business, rental property here, board fees from Washington companies. Leaving Washington isn't a complete escape; it removes the worldwide-income exposure but leaves source-based tax on income that originates here.
The math at nine figures is significant. Even ignoring the embedded gain, the ongoing 9.9% on investment income above $1 million across a multi-decade post-sale period runs into eight or nine figures of cumulative tax. That justifies a real move — and a real move is what the 30-day rule requires.
Move 2: Pre-liquidity-event trust planning
This is the dominant move at nine-figure positions, and the one with the longest lead time. It also does double duty — addressing both ongoing income tax exposure and estate tax planning.
The basic idea: transfer some portion of the appreciated stock into one or more trusts before a liquidity event prices the position. The transfer happens at today's valuation — usually well below where the next tender or IPO will price. After the transfer, future appreciation grows outside your estate, and depending on the trust structure, the income tax on future income from the transferred property may be outside your Washington base.
The toolkit:
Grantor Retained Annuity Trusts (GRATs). Useful for transferring appreciation while keeping a stream of payments back to you. Works well when you expect the underlying value to grow significantly between gift and liquidity.
Intentionally Defective Grantor Trusts (IDGTs). Sales to grantor trusts that freeze value for estate tax purposes while the income tax stays with you. You pay the income tax on trust income, which is itself a wealth transfer.
Non-Grantor Trusts in no-income-tax jurisdictions. Trusts established in states like Nevada, South Dakota, or Delaware that, if structured carefully, may pay tax in the trust's jurisdiction rather than yours. Effectiveness for ESSB 6346 purposes is highly fact-specific. Aggressive Washington sourcing of trust income — especially where the settlor or beneficiaries retain Washington ties — could limit the move's value. The post-2028 trust sourcing rules are one of the unsettled questions about the new law, and lawyers disagree on the aggressive interpretations. This requires specialist drafting and a careful look at retained-ties analysis before relying on it.
Two things drive the lead-time problem.
First, valuation. Gifts are made at today's §409A or appraised value, which sits at a discount to where a tender or IPO will price. Once a sale process starts, that valuation marker firms up — and gifts made close to a known transaction face higher IRS scrutiny on the transfer value, plus potential gift tax exposure if the IRS revalues. The window to do this well is when nobody is talking about a transaction.
Second, structural execution. Trust formation, funding, and administration take time. A GRAT or IDGT structure built in a hurry around a known liquidity event is a structure built badly.
If you're at a company where tenders happen on a roughly annual cadence, and you're not actively doing trust planning between tenders, you're leaving money on the table.
Move 3: Take liquidity when it's offered
This one needs a different framing than people usually give it.
Tenders before January 1, 2028 don't dramatically reduce the state tax bill on the gain itself — SB 5813 already taxes that gain at 9.9% above $1 million. The reasons to take a tender are different:
- Concentration risk. Holding nine figures of one private company is a risk-management problem regardless of taxes.
- Liquidity for planning. Trust funding, charitable structures, and domicile-change costs all require cash. A tender frees up the capital to actually execute the moves above.
- Locking in valuation. Private company valuations are not guaranteed to keep going up. Some readers know this in their bones already.
You are not deciding whether to pay state tax on the cap gain. You are deciding when, how much, and what to do with the proceeds.
Rolling everything into the IPO and hoping for the best is a bet, not a plan.
Move 4: Charitable structures at scale
If you have charitable intent — meaning you'd give the money away anyway — the structures available at this scale change the math meaningfully.
Charitable Remainder Trusts (CRTs) let you transfer appreciated stock to a trust, get an immediate income tax deduction for the present value of the remainder interest, and receive an income stream for life or a term of years. The trust sells the stock without paying capital gains tax, and the gain gets recognized as you draw income — spreading the tax over many years and potentially smoothing the bite of both the existing capital gains tax and ESSB 6346.
Donor-Advised Funds (DAFs) are simpler — donate appreciated stock, get the deduction now, recommend grants to charity over time. No capital gains tax on the donated portion.
Private Foundations make sense at very large scales when family involvement, control, and multi-generational philanthropy are part of the picture.
The honest framing: these structures are most useful when you'd give to charity anyway. The math rarely works as a pure tax play if you're trying to manufacture deductions you didn't otherwise want — you're still giving away principal you could have kept. But for someone planning to give meaningfully regardless, doing it with appreciated pre-IPO stock is dramatically more efficient than doing it after a sale.
Move 5: Integrate the income tax planning with estate planning
At nine-figure positions, the conversation isn't just income tax. The federal estate and gift tax exemption is generous today, but it's scheduled to change. Generation-skipping transfer tax planning matters. Whether and how to use exemption now versus later is a real question.
The 6346 planning shouldn't be designed in isolation from the estate plan. Most of the moves above — particularly the trust planning — do double duty: they reduce ongoing income tax exposure under 6346 and freeze or transfer value out of your taxable estate.
The wrong way to do this is to make an income tax move now and discover two years later that you've used estate exemption you needed for something else, or locked yourself out of a structure that would have been more valuable.
Moves worth mentioning and mostly dismissing
Installment sales. Deferral, not avoidance. Gain recognized in any year is taxed under the law in effect that year — and Washington's capital gains tax is already here. Useful in narrow circumstances, not a general answer.
Opportunity Zone investments. Investment decision first, tax decision second. Federal deferral and partial reduction of gain if you reinvest in qualifying OZ funds — but mostly relevant if you have other reasons to want OZ exposure.
Wait for repeal or court challenge. ESSB 6346 is in active constitutional challenge. It might succeed. Betting hundreds of millions of dollars of tax planning on a court outcome that hasn't happened yet, against a hard deadline that has been signed into law, is a bet, not a plan. And SB 5813's 9.9% capital gains tier is already locked in regardless.
The honest option: stay and pay
For some readers, the right answer is to recognize that 9.9% on the income above $1 million is the price of staying in Washington.
If your roots are deep, your family is here, and the structural moves don't fit your situation, paying the tax may be the cleanest path. There's no shame in that.
But for most people at nine-figure positions, the ongoing tax burden — not just on the embedded gain, but on every year of post-sale investment income above the threshold — is large enough that doing some version of the structural planning above is worth the friction.
What you should actually do this quarter
If you're in this situation, here's the order I'd work through it:
- Get a real number on your combined exposure — the existing capital gains tax on the embedded gain, plus ESSB 6346 on projected post-sale investment income, plus any non-cap-gain comp income, modeled across realistic liquidity and timing scenarios.
- Decide honestly whether you're moving. If you are, start the domicile change now — to qualify for 2028, you need to satisfy all three prongs of the 30-day safe harbor for the entire 2028 calendar year, which means being fully out before January 1, 2028.
- If domicile change isn't on the table, get serious about trust planning. Start the conversation now, not when a tender is announced.
- Integrate any planning with your estate plan, not as a separate exercise.
The longer you wait, the fewer options you have. By 2027, most of the highest-value moves will be functionally unavailable. Trust planning needs lead time. Domicile changes need lead time. The window is open now and closes on a specific date.
If you want my help thinking through your situation, book a consultation.
