Washington’s capital-gains tax is no longer speculative: after court challenges, the 7 % tax on long‑term capital gains over $262,500 (2026 threshold; adjusted annually) is firmly in place. Founders planning exits must now factor state taxes into their models alongside federal liabilities.
Scenario 1: Sell in Washington and pay the tax
If you remain a Washington resident through your liquidity event, long‑term capital gains above the $262,500 exemption will be taxed at 7 %. For example, a founder who sells their company and realizes a $10 million gain would owe tax on $9 737 500 (the gain minus the exemption). At 7 %, that’s roughly $681 625 in Washington tax—on top of federal capital‑gains tax. Plan ahead by setting aside cash for the state bill and discussing instalment options with your tax advisor.
Scenario 2: Leverage QSBS and other federal exclusions
Section 1202 of the Internal Revenue Code allows founders of qualified small‑business stock (QSBS) to exclude up to $10 million in gains (or 10 × basis, whichever is greater) from federal tax if they meet the five‑year holding requirement. Washington’s capital‑gains tax piggybacks on the federal definition of net long‑term capital gains, so any amounts excluded under §1202 are also excluded from the state tax. If your shares qualify, consider timing your exit after the five‑year mark. A founder with $10 million in QSBS gains could potentially pay no state or federal capital‑gains tax on that portion, though gains above the QSBS exclusion would still face the 7 % Washington tax.
Scenario 3: Change residency before your exit
Washington’s capital‑gains tax applies only to Washington residents. Some founders consider relocating to a no‑income‑tax state (e.g., Nevada or Texas) before a sale. To avoid Washington tax, you must establish domicile elsewhere and sever ties with Washington before the transaction closes. This typically involves moving your primary residence, changing voter registration and driver’s license, and physically spending most of your time outside Washington. Note that Washington’s Department of Revenue will scrutinize such moves, and partial‑year residency could still trigger tax on gains accrued while domiciled in Washington. Consult counsel well in advance—ideally 6‑12 months before the anticipated liquidity event—to ensure compliance.
Implications for founders
- Model your after‑tax proceeds under each scenario, including federal, state and alternative minimum tax considerations.
- Review your stock’s QSBS status early. Make sure corporate records support qualification and consider remedying any defects before the five‑year clock runs out.
- Document residency changes meticulously if relocating. Audits can be expensive; contemporaneous evidence of your move is critical.
- Stay informed about legislative changes. Thresholds and rates may adjust annually, and further litigation could affect the tax’s scope.
Conclusion
The introduction of a Washington capital‑gains tax reshapes the exit landscape for founders. Whether you plan to stay in the state, qualify for QSBS, or relocate, proactive planning can significantly reduce tax exposure and avoid unpleasant surprises. Engage your advisors now to identify the best path for your circumstances.
