Washington’s Capital Gains Tax and QSBS: Why Excluded Gain Isn’t Taxed

Washington’s capital gains tax applies only to long-term capital gain recognized for federal purposes. Because QSBS gain excluded under IRC § 1202 is not included in your federal net long-term capital gain, it also drops out of the Washington tax base.

• Washington’s capital gain base is your federal net long-term capital gain, so Section 1202-excluded QSBS gain is not taxed by the state.
• The statute and Washington Administrative Code expressly subtract QSBS exclusions when computing Washington capital gains.
• Only non‑QSBS gains are subject to Washington capital gains tax; maintain documentation to prove QSBS status.
• To qualify for QSBS, your stock must be issued by a domestic C corporation with assets under $50 million, meet the active business requirement, be acquired at original issuance, and be held for at least five years.