Does Washington’s Capital Gains Tax Apply to QSBS Gains?

Many Washington founders are surprised by how the state’s new capital gains tax interacts with the federal Qualified Small Business Stock (QSBS) exclusion under Section 1202.

The short answer: if your gain is excluded under federal law, it’s also excluded for Washington purposes.

Washington’s capital gains tax starts with your federal net long‑term capital gain figure — the same number reported on your federal return. If you sold QSBS that qualifies for the Section 1202 exclusion, that gain never enters your federal taxable income, so there’s nothing for Washington to tax.

Beginning with the 2025 tax year, Washington’s capital gains tax follows a tiered rate structure. Your first $1 million of taxable Washington capital gains is taxed at 7%. Any Any amount exceeding $1 million is taxed at 9.9% (the 7% tax plus an additional 2.9%).

Put simply, Washington doesn’t separately tax gains that the federal government already excluded.

That’s good news for founders holding QSBS: your exclusion works at both levels. But it’s important to keep documentation proving your stock qualifies — if audited, you’ll need to show the federal exclusion was valid.