Updated September 10, 2026
Yes. Under Washington law as enacted, gain validly excluded under Section 1202 stays outside the new personal income tax. Washington’s Department of Revenue also confirms that gain excluded from federal net long-term capital gain under Section 1202 is outside the state’s capital gains excise tax.
That answer applies to the excluded gain. It does not make all proceeds from a startup exit tax-free. Gain above the federal limit, the taxable portion of a partial exclusion, and compensation require separate calculations.
Why excluded QSBS gain stays outside the income tax
Section 1202 excludes qualifying gain from federal gross income. Washington’s new income tax begins with federal adjusted gross income, subject to state modifications. Section 301 of ESSB 6346 preserves federal exclusions unless specifically added back; the enacted law contains no QSBS add-back.
The tax begins January 1, 2028. For the rate, standard deduction, residency rules and other income categories, see the Washington income-tax guide.
The separate capital gains tax
The capital gains excise tax starts with federal net long-term capital gain and applies Washington’s adjustments, allocation rules and deductions. The Department of Revenue’s QSBS FAQ confirms that gain excluded from that federal figure under Section 1202 is not subject to the tax.
Any non-excluded long-term stock gain needs its own state calculation. Use the sale year’s rules and deduction amounts, rather than treating the income tax’s $1 million standard deduction as the capital gains tax’s deduction. See the Washington capital gains tax guide.
How the two Washington taxes interact
For non-excluded gain, the enacted law requires a coordinated calculation:
- Section 302 first removes federal long-term capital gains and reverses federal long-term capital losses included in AGI.
- For taxpayers owing capital gains excise tax, it adds back Washington capital gains subject to that tax plus the standard deduction taken under RCW 82.87.060(1). Gains and losses from sales exempt under RCW 82.87.050 remain excluded.
- Section 205 then allows a nonrefundable credit against income tax for the same year’s Washington capital gains tax, limited to income tax otherwise due.
Do not simply add two headline rates together. Nor does the initial removal of federal long-term gains mean that all such gains permanently disappear from the income-tax calculation. Apply both the add-back and the credit. Read sections 205 and 302.
A partial-exclusion example
Assume an individual acquires qualifying stock after July 4, 2025, holds it for four years, and realizes $5 million of gain. Assume the entire gain fits within the shareholder’s available per-issuer eligible-gain limit and all other Section 1202 requirements are met.
- Federal exclusion at 75%: $3.75 million.
- Non-excluded federal gain: $1.25 million.
The $3.75 million excluded portion stays outside the Washington tax bases described above. The $1.25 million remainder requires the capital gains calculation and, beginning in 2028, the coordinated income-tax calculation. This example determines the two portions of gain; it does not assume a final state tax bill without the taxpayer’s other income, losses, deductions and allocation facts.
Confirm how much gain is actually excluded
Section 1202 applies different holding-period and dollar-limit rules depending on the statutory acquisition date. Post-July 4, 2025 stock can qualify for the 50%, 75% and 100% tiers at three, four and five years. Do not apply those tiers to older stock or assume every older holding qualifies for 100% exclusion.
The per-issuer limit also requires the applicable dollar limit, prior eligible gain and the alternative ten-times-basis rule. Spouses do not automatically receive two full dollar limits merely because each owns shares. Use the main QSBS guide for the eligibility and limitation analysis.
Excluded does not mean unreported. The IRS Schedule D instructions explain reporting a QSBS sale and claiming the exclusion on Form 8949. Keep the records supporting eligibility, holding period, basis and the exclusion claimed.
Planning before a sale
Check the law applicable to the sale year before relying on today’s treatment. State conformity can change. Washington considered that possibility in 2026: SB 6229 and HB 2292 would have subjected federally excluded QSBS gain to Washington’s capital gains tax, but neither passed. Oregon went the other direction: for tax years beginning on or after January 1, 2026, Oregon requires an addback of gain excluded federally under §1202. A Washington result also does not establish the treatment in another state.
Model the transaction as a whole: excluded gain, non-excluded gain, and any compensation or other income. Moving a sale before 2028 is not automatically a tax saving; shortening a holding period can also reduce the federal exclusion.
What to establish before relying on QSBS
Document eligibility first, calculate the exclusion second, and model the remaining income under each applicable tax. For the supporting company records, see the QSBS attestation checklist.
This article is educational and is not legal or tax advice for a particular transaction.
