RSUs and Washington State's New Taxes: What Seattle Tech Employees Need to Know

If you work at a Seattle-area tech company and hold restricted stock units, Washington's new tax landscape changes your planning calculus significantly. Between the capital gains tax (in effect since 2022, with a 9.9% top tier added effective 2025) and the income tax arriving in 2028, RSU holders face a layered set of state tax obligations that didn't exist a few years ago.

In 60 seconds:

• RSU settlement in cash or vested shares generally creates ordinary income. Public-company settlement often coincides with vesting; deferred settlement can occur later. Washington’s 9.9% income tax begins in 2028.
• Appreciation after share settlement is generally capital gain. Washington taxes taxable long-term gains at 7%, plus an additional 2.9% on Washington capital gains above $1 million after applicable deductions.
• Compensation and later share appreciation are separate tax components. Beginning in 2028, Washington’s income-tax calculation also has a long-term-gain modification and a credit for capital gains tax.
• Planning starts with the award’s settlement terms, withholding, liquidity and sale timing. Changing payment dates requires a §409A review.

This guide breaks down how Washington's taxes apply to RSUs, where the traps are, and what you can do about it.

How RSUs Are Taxed: The Federal Baseline

An RSU is a promise to deliver cash or shares. For a typical unfunded award, federal ordinary income generally arises at settlement in cash or vested shares, not merely when a service-vesting condition is satisfied. Public-company RSUs often vest and settle together; private-company awards may have separate conditions or compliant deferred settlement. See Treas. Reg. §1.83-3(e) and the §409A rules.

After stock settlement, later sale proceeds minus tax basis generally produce capital gain or loss. Basis ordinarily includes the value already taxed as compensation, so that value is not taxed again as sale gain. Long-term treatment generally requires holding the shares for more than one year after acquisition; check the actual transfer date.

Here's what that looks like at the federal level:

• At taxable settlement: the cash or vested-share value is generally ordinary compensation. Federal income tax and employment taxes apply under their respective rules. For deferred compensation, FICA can arise before settlement under §3121(v)(2).
• At sale: appreciation above tax basis is capital gain. Long-term federal rates are generally 0%, 15% or 20% depending on taxable income; the 3.8% net investment income tax can also apply.

Do not infer a tax bill solely from a top marginal rate. Filing status, deductions and other income matter. Additional Medicare tax is 0.9% above $250,000 for joint filers, $125,000 for married filing separately and $200,000 for other filers. Employer withholding begins above $200,000 regardless of filing status, so withholding can differ from final liability.

Washington's Capital Gains Tax and RSUs

Washington's capital gains tax, in effect since January 1, 2022 (with the 9.9% top tier added by SB 5813 effective January 1, 2025), applies to long-term capital gains above the annual standard deduction ($250,000 base, indexed — $278,000 for 2025). The rates are tiered:

• Gains up to the standard deduction ($278,000 for 2025, indexed): exempt
• First $1 million of Washington capital gains after applicable deductions: 7%.
• Washington capital gains above that $1 million after deductions: 9.9% combined (7% plus 2.9%). See RCW 82.87.040.

How this hits RSU holders: selling shares for more than their settlement-date tax basis creates gain. Washington capital gains tax can apply when the gain is long-term, allocated to Washington and exceeds the applicable deductions, after exemptions and other adjustments.

For example, shares delivered and taxed at $50 per share and sold years later at $200 have $150 per share of gain, before selling costs. The annual standard deduction was $278,000 for 2025; use the deduction for the actual sale year.

Important: ordinary RSU compensation is not subject to Washington’s capital gains tax. Subsequent long-term appreciation may be. Starting in 2028, the income-tax rules discussed below can also reach that gain.

For more on the capital gains tax, see my Washington capital gains tax guide.

Washington's New Income Tax and RSUs

Governor Ferguson signed ESSB 6346 on March 30, 2026, creating a new individual income tax. It takes effect January 1, 2028. Here's what it means for RSU holders:

• A $1 million standard deduction applies in 2028 for a full-year resident; spouses and registered domestic partners share one deduction, whether filing jointly or separately. Nonresident deductions are apportioned, and §316 sets the inflation-adjustment process beginning in October 2029 for taxes due the following calendar year.
• The rate is 9.9% on income above $1 million.
• The base starts with federal AGI and applies statutory modifications, including the special long-term-gain rule in §302. Ordinary RSU compensation generally enters that base; deductions, exclusions, residency and sourcing affect the result.

For RSU holders, taxable settlement can create an income spike. Salary plus RSU compensation can exceed the shared $1 million deduction. Merely satisfying a service-vesting condition does not necessarily trigger that income.

For a full-year Washington resident in 2028, assume $400,000 salary and $800,000 taxable RSU settlements, with no other income, adjustments, deductions or credits. Washington taxable income is $200,000 after the $1 million deduction, producing $19,800 of state income tax.

Employees with substantial RSU packages should forecast settlement income and other household income together, using the actual grant terms and expected share values.

For more detail on the income tax itself, see my post on Governor Ferguson signing Washington's income tax into law.

The Combined Tax Burden: A Worked Example

This illustration isolates the two Washington taxes under the enacted 2028 income-tax framework. It assumes a full-year resident, no other income or adjustments, and no credits except §205. For transparent arithmetic, it holds the capital-gains deduction at the 2025 amount of $278,000; this is not a forecast of the 2028 deduction. Federal tax is not estimated without filing-status and deduction assumptions.

Facts:

• Base salary: $350,000
• Taxable RSU settlements: $900,000 in vested shares
• Total ordinary income: $1,250,000
• In the same year, shares acquired at settlement 18 months earlier are sold for $400,000 of long-term gain; assume the entire gain is allocated to Washington and no exemption applies.

Washington taxes:

• Income tax: ESSB 6346 §302 removes the $400,000 federal long-term gain and adds back $122,000 of Washington capital gains plus the assumed $278,000 capital-gains deduction. Washington base income is $1,650,000. After the separate $1 million income-tax deduction, taxable income is $650,000 and tentative tax is $64,350.
• Capital gains tax: 7% × ($400,000 − $278,000) = $8,540. The §205 credit reduces income tax to $55,810. The credit cannot exceed income tax otherwise due and has no carryforward or refund.

Total Washington tax under these assumptions: $64,350 ($55,810 income tax plus $8,540 capital gains tax).

Use the sale year’s actual indexed deduction when preparing a forecast or return. With other assumptions unchanged, a different capital-gains deduction can shift dollars between the two taxes. The §302 add-back applies only when the taxpayer owes Washington capital gains tax that year.

The Private Company RSU Problem Gets Worse

The private-company liquidity problem arises when taxable RSU settlement delivers shares that cannot be sold. Some awards address this through properly structured liquidity conditions or deferred settlement. Service vesting alone does not establish that income tax is due.

Beginning in 2028, taxable settlement can also increase Washington income tax. The key questions are when income is recognized, how the shares are valued then, and whether cash is available for withholding and final tax payments.

Example: In 2028, a full-year resident receives $600,000 of vested private-company shares at taxable RSU settlement and earns $500,000 salary. Assume no other income, deductions, adjustments or credits. Use fair market value at the taxable event; an older option-pricing appraisal does not automatically establish it.

• Federal tax depends on the employee’s filing status and other tax facts; this example does not estimate it.
• Washington income tax: 9.9% x $100,000 = $9,900
• Liquidity required: the $9,900 incremental Washington income tax, plus applicable federal liabilities. The tax result assumes settlement, not service vesting alone.

For early-stage companies, stock options can offer more timing flexibility. That flexibility is bounded by expiration dates, post-termination windows, plan terms, trading restrictions and the employee’s ability to fund exercise and taxes.

RSUs vs. Stock Options: The Washington Tax Comparison

With Washington's new tax layers, the choice between RSUs and stock options has meaningful state tax implications.

Stock options (ISOs):

• No tax at grant or vesting.
• A qualifying ISO exercise-and-hold generally creates no regular federal income, but the spread can require an AMT adjustment. A same-calendar-year sale generally removes that separate adjustment and is a disqualifying disposition; a later-year sale does not erase the exercise-year adjustment.
• If you meet the holding period requirements (2 years from grant, 1 year from exercise), the gain is long-term capital gains — which means Washington's capital gains tax applies, but only above the standard deduction ($278,000 for 2025, indexed).
• A qualifying ISO exercise-and-hold generally produces no ordinary income in federal AGI, although federal AMT may apply. A later sale needs a separate analysis. Under §302, long-term gain can return to the income-tax base when Washington capital gains tax is owed, with a §205 credit for that tax. Qualifying QSBS gain is excluded to the extent §1202 allows; ISO status alone does not establish a state-tax exemption.

RSUs:

• Ordinary income generally at settlement in cash or vested shares, often at vesting for public-company awards; Washington income tax can apply beginning in 2028.
• Post-settlement appreciation is generally capital gain; Washington capital gains tax applies only to taxable long-term gain allocated to Washington.
• Double exposure: RSU holders can be hit by both Washington taxes on different components of the same equity.

Stock options (NSOs):

• For a typical NSO exercised into vested shares, the spread is ordinary income, with Washington income-tax exposure beginning in 2028.
• Exercise timing may be flexible within the plan’s deadlines and restrictions; compare cash needs and total taxes before spreading exercises across years.

The planning flexibility of stock options — particularly ISOs — becomes more valuable in a state that taxes both ordinary income and capital gains. For more on the ISO vs. NSO decision, see my complete guide to ISOs vs. NSOs.

For a deeper look at how to structure equity compensation plans with taxes in mind, see my equity compensation plan design guide.

Section 409A: The Compliance Layer

RSUs may be exempt from §409A, including under the short-term-deferral exception, or may be subject to its deferred-compensation requirements. Do not assume that every RSU requires deferred payment or that every private-company RSU is covered.

Why it matters: for a §409A failure, vested affected deferrals not previously included can become immediately taxable, including amounts under applicable plan-aggregation rules. Section 409A adds a 20% federal tax and an interest-based additional tax. It does not automatically include every unvested award. The included compensation may also affect Washington’s income-tax base beginning in 2028.

The key compliance requirements for private company RSUs:

1. Valuation: establish supportable value at the relevant taxable event. The independent-appraisal safe harbor commonly used to price options is not a universal annual-appraisal requirement for RSUs.
2. Separate vesting from payment: changing a forfeiture condition does not necessarily change the permissible payment date.
3. Settlement terms: an award subject to §409A needs compliant payment dates or events and must be operated accordingly. An IPO is not, by itself, a permitted §409A payment event.
4. Payment acceleration: §409A generally restricts accelerating payment. Treas. Reg. §1.409A-3(j)(1) expressly permits accelerating vesting if the other §409A requirements, including permissible payment timing, remain satisfied.

For valuation of options, see my 409A valuations guide. For RSU payment design, review the payment regulations with counsel before changing an award.

Planning Strategies for Washington RSU Holders

Given the new tax reality, here are the strategies worth considering:

1. Manage the $1 Million Threshold

Since Washington's income tax only kicks in above $1 million, the most direct planning opportunity is managing how much income falls into any single tax year.

• If you have flexibility on exercise timing (for options, not RSUs): spread exercises across years to stay under $1 million.
• For RSUs: model taxable settlements, not just vesting dates. Any timing changes must satisfy an exemption or §409A’s payment and election rules.
• Compare grant and settlement schedules: smaller grants do not necessarily produce smaller annual taxable settlements. Existing overlapping awards and share-price changes matter.

2. Hold After Vesting (With Caution)

Selling shares promptly after taxable settlement generally leaves little additional gain or loss. Holding them does not convert compensation already recognized into capital gain; only later price changes affect capital gain or loss. Long-term gain may face Washington capital gains tax and, beginning in 2028, the §302 income-tax modification and §205 credit.

But don't hold purely for tax reasons. Concentration risk in a single stock is real. The tax tail shouldn't wag the investment dog.

3. Charitable Giving With Appreciated Shares

A completed gift of appreciated shares to an eligible charity or donor-advised fund before a sale is binding can avoid recognition of the donated appreciation. The deduction is a separate question:

• A gift of shares generally avoids a donor sale; donating cash after selling shares does not erase the sale gain.
• Check the recipient’s eligibility and complete the transfer before the donor’s right to sale proceeds is fixed.
• An FMV deduction may be available for qualifying long-term capital-gain property, subject to recipient-specific rules, percentage limits, substantiation and appraisal requirements. Short-term holdings generally do not receive a deduction for appreciation. See IRS Publication 526.

This can be particularly effective in high-income years where you're already over the $1 million threshold.

4. Consider the 83(b) Election (For Restricted Stock Awards, Not RSUs)

For actual restricted stock, a §83(b) election generally includes transfer-date FMV minus the amount paid. File ordinarily within 30 days of the stock transfer, subject to applicable weekend, holiday or specific statutory relief. It can move the tax point before substantial vesting, but does not guarantee capital-gain treatment for every later transaction.

An unfunded RSU promise is not property eligible for §83(b). Stock acquired through an early exercise may be eligible; the election applies to the transferred stock, not the unexercised option. Early-exercised ISOs also need a separate AMT analysis.

5. Accelerate Income Before 2028

The income tax doesn't take effect until January 1, 2028. If you have options you're planning to exercise or any other control over income timing, there's a window to recognize income in 2027 at a 0% Washington income tax rate.

For more strategies on timing around Washington's tax changes, see the Washington Founder Exit Map.

Double-Trigger RSUs and Washington Tax Timing

Some private-company RSUs condition vesting on both service and a qualifying liquidity event, then settle promptly. Other awards defer settlement after vesting. The documents must establish an exemption or compliant §409A payment arrangement; merely labeling an award “double-trigger” is insufficient.

This creates an interesting Washington tax question: when is the income recognized?

For a compliant unfunded arrangement, ordinary income generally arises when settlement delivers cash or vested shares. If service requirements are met in 2027 and a valid arrangement settles in 2029, income generally arises in 2029. An IPO alone is not a permissible §409A payment event for an award subject to §409A. Payroll-tax timing can differ.

For Washington tax purposes, this matters because:

• If settlement occurs before 2028: no Washington income tax.
• If taxable settlement occurs in 2028 or later, include it in the Washington income-tax analysis, taking account of residency, sourcing, deductions and other income.

Read the actual vesting and payment provisions, including any expiration date and treatment when liquidity never occurs. Also distinguish RSU service-plus-liquidity conditions from acquisition-related double-trigger vesting acceleration.

Relocation is a separate sourcing question. ESSB 6346 §403 allocates nonresident employment compensation to Washington services and generally apportions mixed-state services by workdays or another Department-approved reasonable method. Moving before settlement does not alone resolve sourcing. Confirm the service period and applicable guidance for the award; the statute does not itself prescribe a universal grant-to-vesting formula.

For more on double-trigger acceleration, see my guide to double-trigger acceleration.

What About QSBS?

Shares a corporation issues when RSUs settle can qualify as QSBS issued for services under §1202(c)(1)(B)(ii). The practical issues are the late acquisition date and whether the issuer meets the gross-assets and other tests when shares are issued. Post-July 4, 2025 acquisitions can receive 50% exclusion at three years, 75% at four and 100% at five; earlier acquisitions generally require more than five years, with the percentage depending on vintage. The exclusion applies to eligible capital gain, not RSU compensation.

If you're at a qualifying C corporation and want QSBS treatment, stock options (particularly ISOs or early-exercised options with an 83(b) election) are the better vehicle because:

• Vested shares are generally acquired at option exercise, starting the relevant stock holding period. For unvested shares, analyze §83(b), ISO and AMT rules separately.
• The gain at sale can qualify for the Section 1202 exclusion.
• The exclusion currently eliminates Washington capital gains tax as well (since excluded gain falls out of the WA tax base).

For more on QSBS planning in Washington, see my guide to QSBS and Washington's capital gains tax.

Key Takeaways

1. Taxable RSU settlement generally creates ordinary income. Vesting and settlement may coincide, but must be checked separately.
2. Later share appreciation is generally capital gain. Washington applies 7% to taxable Washington capital gains, plus 2.9% on the portion above $1 million after deductions.
3. Model the two Washington taxes together. Compensation and later share gain are distinct; §302 controls long-term gain in the income-tax base and §205 supplies a limited nonrefundable credit.
4. Private-company settlement can create a liquidity problem if the taxable shares cannot be sold; service vesting alone does not establish the income-tax bill.
5. Stock options offer more planning flexibility in Washington's new tax environment, particularly ISOs with their capital gains treatment.
6. The 2027 window matters — income recognized before 2028 avoids the state income tax entirely.
7. RSU-settled shares can be QSBS. Later issuance can leave insufficient holding time or miss the issuer’s gross-assets limit; review the facts before selecting an award.

This post is for informational purposes only and does not constitute legal or tax advice. Consult a qualified attorney or tax advisor for guidance specific to your situation.

Joe Wallin is a shareholder at Carney Badley Spellman in Seattle, where he leads the startup law practice. He is a co-author of The Holloway Guide to Equity Compensation and Angel Investing: Start to Finish.

Related Reading

• The Alternative Minimum Tax and Stock Options: A Complete Guide for Washington Startup Employees
• The Complete Guide to Equity Compensation for Startups
• Founder Issues

Questions about RSU settlement and Washington taxes? Book a 20-minute call with Joe Wallin or email wallin@carneylaw.com.