Washington QSBS Update: SB 6229 & HB 2292 Could Tax Section 1202 Gains
Good news for Washington founders: two bills that would have significantly harmed QSBS benefits have died in committee. SB 6229 and HB 2292, which would have added Section 1202 excluded gains back to the Washington capital gains tax base, did not advance in the 2024 legislative session. The federal QSBS exclusion remains intact for Washington residents. But the threat was real, and similar proposals will likely return. Here's what these bills would have done, why they failed, and what this means for your QSBS planning going forward.
What SB 6229 and HB 2292 Proposed
Both bills targeted a quirk in how the Washington capital gains tax interacts with federal tax law. Under federal Section 1202, founders of qualified small business stock (QSBS) can exclude up to 100% of their gain from federal taxation (on gains up to $10 million). This is one of the most valuable federal tax benefits for startup founders.
Washington's capital gains tax, which took effect January 1, 2022 (after litigation delays), taxes long-term capital gains on real property and financial assets. But the statute was drafted to follow federal income tax law definitions. Because gains are excluded from federal taxable income under Section 1202, they're also excluded from Washington's capital gains tax base — at least under current law.
SB 6229 and HB 2292 would have closed this gap by explicitly adding Section 1202 excluded gains back into the Washington capital gains tax base. In other words, even if you excluded the gain from federal taxation under Section 1202, you would still owe Washington state capital gains tax on the excluded amount.
Example of the impact: A Washington founder holds QSBS from a C corporation. The founder's cost basis is $500,000. The sale price is $10.5 million. The gain is $10 million.
Under current law and federal Section 1202, the gain is 100% excluded from federal taxation. Washington capital gains tax also does not apply. Net tax: $0 (except for any federal net investment income tax on very high earners, which is a separate issue).
Under SB 6229 or HB 2292, the gain would be excluded from federal taxation, but the full $10 million would be added back to the Washington capital gains tax base. At the 9.9% rate (effective 2028), the founder owes approximately $990,000 in Washington state tax, even though the federal gain is fully excluded.
This transforms QSBS from a powerful tax benefit to a much weaker benefit. The exclusion is still valuable (it saves federal tax), but it no longer saves state tax.
Legislative History and Timeline
SB 6229 was introduced in the 2024 Washington legislative session by Senator Emily Randall. HB 2292 was introduced in the House by Representative Tom Dent. Both bills were positioned as revenue-raising measures and addressed to a perceived "loophole" in the capital gains tax.
The stated rationale was that QSBS holders were able to "avoid" Washington capital gains tax by using a federal tax exclusion, which was characterized as tax avoidance. The legislature was concerned about revenue loss as more startups exited and their founders claimed QSBS benefits.
Neither bill received a committee hearing in the 2024 session. Both died in committee without a vote. There was no floor debate, no public testimony, no legislative history beyond the bill text itself.
The bills were not re-introduced in the 2025 session, suggesting they may have lost political momentum (at least for now). But their introduction signals that the legislature views QSBS as a potential revenue target.
Why the Bills Failed
Several factors likely contributed to the failure of SB 6229 and HB 2292:
Strong opposition from the startup and VC community. Washington's startup ecosystem is significant and well-organized. Companies like Amazon, Microsoft, and Salesforce, along with venture capital firms, have substantial political influence. When a tax proposal threatens startup founders' ability to accumulate wealth, that constituency mobilizes. Organized opposition from the tech community likely played a role in the bills' failure.
Economic development concerns. Legislators are aware that Washington is competing with other states to attract and retain tech talent and companies. Proposals that reduce the benefits of startup equity are seen as potentially harmful to economic development. A founder who could stay in Washington with full QSBS benefits, but can save significant taxes by relocating to Nevada or Florida, is more likely to leave. This calculus weighs against policies that erode QSBS benefits.
Timing and other fiscal pressures. In 2024, Washington had a significant budget surplus. There was less urgency to raise revenue through controversial tax changes. If future sessions face budget deficits, similar proposals may gain traction.
Doability concerns. There may have been legal concerns about the bills. Explicitly addingback federal tax benefits to a state tax base raises constitutional questions (dormant commerce clause, due process). The bills may not have survived legal challenge. Some legislators may have been hesitant to vote for bills they suspected would be overturned in court.
Lack of explicit economic data. Neither bill included detailed analysis of how much revenue the state would gain, or how many taxpayers would be affected. Without concrete data, it's harder to justify a controversial change.
What This Means for Washington QSBS Going Forward
The exclusion is preserved — for now. For 2024 and into the foreseeable future, Section 1202 excluded gains are not subject to Washington capital gains tax. QSBS remains a valuable benefit for Washington founders.
But don't assume permanence. The bills that died in 2024 may reappear. Future legislatures with budget pressures may succeed where current legislators failed. The QSBS benefit is not constitutionally protected; it exists because the statute allows it. If the statute changes, the benefit changes with it.
Plan accordingly. If you hold QSBS, don't automatically assume you can hold it indefinitely and sell whenever convenient. Consider factors like:
- The potential for future legislative changes that would tax QSBS gains
- Whether your timeline for exit aligns with current law (2024-2028) or extends beyond
- Whether a domicile change might be beneficial (to avoid Washington capital gains tax entirely) for a sale that occurs years in the future
- Whether an early exit (before future tax increases) might be valuable
This is not a reason to panic or dump your stock. But it is a reason to factor future tax risk into your exit planning.
Comparison to How Other States Handle QSBS
Washington is not the only state grappling with QSBS and capital gains taxation. Here's how other key states approach the issue:
California. California taxes long-term capital gains at ordinary income rates (top rate ~13.3%), with no exception for QSBS. A California resident with Section 1202 excluded federal gains still pays California tax on those gains. QSBS provides federal benefit only. California has had similar proposals to explicitly deny QSBS benefits at the state level, though the federal exclusion already makes California taxation unavoidable.
Oregon. Oregon passed SB 1507 in 2021, which treats QSBS gains as taxable for state purposes even if excluded federally. In other words, Oregon explicitly takes the position that it will tax QSBS gains notwithstanding federal exclusion. Oregon has had the explicit anti-QSBS provision for years.
Illinois. Illinois has considered similar proposals but has not enacted them into law. The state's political environment is currently more favorable to business than some other high-tax states.
New York. New York does not currently have a capital gains tax at the state level (beyond the regular income tax), so QSBS exclusion is not an issue there. However, New York has similar proposals under discussion.
Texas, Nevada, Florida, Wyoming. These low-tax or no-income-tax states do not have capital gains taxes and do not challenge QSBS benefits. A founder who relocates to one of these states can enjoy full QSBS benefits and avoid state-level capital gains taxation entirely.
Washington is in the middle ground. The state has a capital gains tax but has (so far) not explicitly overridden QSBS exclusion. But the danger is clear: other states have moved to explicitly tax QSBS, and Washington has shown willingness to consider similar measures.
Broader Trend: States Challenging QSBS and Capital Gains
The pattern is national. As states face revenue pressures and observe federal tax benefits (like QSBS) that reduce state tax receipts, they increasingly look to override those benefits at the state level. This is part of a broader trend of state-federal tax misalignment.
Some states are implementing "add-back" statutes that specifically include federally excluded gains in state taxable income. Others are imposing capital gains taxes at rates designed to offset federal benefits. The rhetoric typically frames this as closing a "loophole," though founders see it as duplicative taxation on gains that are supposed to be incentivized at the federal level.
The consequence is fragmentation. A founder's tax bill depends not just on the gain amount, but on which state the founder is a resident of at the time of sale. This incentivizes tax-driven relocation — which is economically distortive and bad for states that lose revenue and talent.
Washington's choice to allow QSBS exclusion (so far) is relatively founder-friendly compared to California or Oregon. But the bills that were introduced show that this advantage could disappear.
What Should Founders Do?
If you hold QSBS or are considering a QSBS grant, here's what you should think about:
Verify QSBS qualification. Not all startup stock is QSBS. The stock must be in a C corporation, issued at its formation or shortly thereafter, with gross assets not exceeding $50 million at issuance. If you're not sure whether your stock qualifies, have a tax lawyer verify. Assuming QSBS qualification without verification is risky.
Understand the federal and state benefits. Federal Section 1202 allows exclusion of up to 100% of gain (on gains of $10 million or more). But Section 1202 has holding period requirements (generally 5+ years) and other conditions. Make sure you understand what you're entitled to and what you're not.
Don't rely solely on QSBS for Washington state tax purposes. While QSBS currently excludes Washington capital gains tax, that could change. Have a backup plan (domicile change, installment sale, charitable giving) if a future legislature decides to tax QSBS gains.
Consider timing. If your company is approaching an exit, closing the sale in a year when you know QSBS benefits are preserved (now, through 2027) is less risky than delaying and hoping future legislatures don't change the law. This is not a reason to force a premature exit, but it should factor into timing decisions.
Monitor legislative developments. If you hold significant QSBS, pay attention to tax bills in the Washington legislature. If another bill similar to SB 6229 is introduced, reach out to your legislators and express your concerns. Founder voices are surprisingly effective in defeating anti-QSBS proposals.
Consult with a tax professional. QSBS taxation is complex, and the interaction between federal and state taxes requires careful analysis. A tax lawyer or CPA who specializes in startup taxation can help you structure your holdings and exit to maximize benefits and minimize risk.
For Startups and Investors
If you're a startup considering equity grants or an investor in Washington startups, the QSBS situation is important context:
QSBS qualification is valuable but fragile. QSBS is one of the most powerful tools for startup wealth creation. But it depends on federal law and state law cooperating. Washington's law is currently cooperative, but that's not guaranteed forever.
Domicile planning is increasingly important. For large exits, founders may want to consider domicile changes to avoid Washington capital gains tax entirely. This is a legal and growing practice among high-wealth founders. If you're working with a founder, raise the issue of domicile planning in the context of exit planning.
Stay informed about tax policy. As an investor or startup leader, understanding tax implications of exit scenarios is important. Set aside time to monitor tax legislative developments and update your exit plans accordingly.
The Uncertain Future
For now, Washington QSBS benefits are intact. SB 6229 and HB 2292 failed, and the legislature has moved on to other issues. But the threat showed that QSBS is a potential legislative target.
The smart approach is to enjoy the current benefit, assume it's not permanent, and build flexibility into your planning. If you hold significant QSBS or are planning an exit that will trigger QSBS gains, now is the time to work with a tax professional on a comprehensive strategy that accounts for both current law and potential future changes.
The good news is that even if Washington does eventually tax QSBS gains, founders have options: they can relocate to a lower-tax state, structure sales across multiple years, use charitable giving, or implement other strategies. The key is to plan in advance, not to react after the fact.
For more information on QSBS planning and Washington capital gains tax strategies, see our Washington State Tax Planning Guide for High Earners.
