Short answer: Washington coordinates its capital gains tax and the new 9.9% income tax through adjustments and a nonrefundable credit. Long-term gains are removed from federal AGI, and the statutory gain addback applies only when Washington capital gains tax is owed. Ignoring other credits, combined liability is the greater of the capital gains tax and the income tax calculated before the §205 credit. Calculate the income tax on the taxpayer’s full applicable base; income above $1 million does not make every additional long-term gain taxable at 9.9%.
Status (as of August 24, 2026): Washington's 9.9% tax on income above the $1 million standard deduction remains law, effective January 1, 2028, unless voters repeal it or the courts strike it down. Initiative 645 is on the November 3, 2026 ballot and would repeal that tax if it passes; it would not repeal the capital gains excise tax (chapter 82.87 RCW), which the Washington Supreme Court upheld in Quinn v. State. No court has enjoined the income tax. Plan as though it arrives on schedule — treat repeal or a court win as a tail benefit, not a plan.
This post is part of the Complete Guide to Washington's New Income Tax. For the capital gains tax itself, start with the Washington capital gains tax guide.
Two taxes, one taxpayer
By 2028, a Washington resident with a large liquidity event faces two separate state regimes. The capital gains excise tax (chapter 82.87 RCW) has been in effect since January 1, 2022: 7% on long-term capital gains above the standard deduction ($278,000 for tax year 2025, indexed), plus a 2.9% surtax — a 9.9% top rate — on taxable gains over $1 million. The income tax (ESSB 6346) begins January 1, 2028: 9.9% on income above the $1 million standard deduction ($1 million per individual; married couples share one), starting from federal AGI.
The §205 credit prevents simply adding the capital gains tax to the income tax calculated before that credit. The examples below show how the gain adjustments and credit affect the combined bill.
The §302 pipeline
Section 302 of ESSB 6346 performs three operations on your federal AGI, in order:
First, it strips out every long-term capital gain. §302(1) deducts from federal AGI "any long-term capital gains that have been included in computing federal adjusted gross income." All of them — every dollar.
Second, it adds back long-term capital losses. §302(2) reverses any long-term capital losses included in federal AGI. More on why this matters below.
Third, it adds back the gains Washington actually taxes. §302(3) returns to the base "the amount of Washington capital gains subject to tax under chapter 82.87 RCW for the same taxable year, plus the amount deducted under RCW 82.87.060(1)" — that is, your taxable Washington gain plus the capital gains standard deduction. Only that standard deduction is added back; other chapter 82.87 deductions require separate treatment. The addback applies only when Washington capital gains tax is owed. QSBS gains excluded under Section 1202 (which never reach AGI in the first place), long-term real estate gains exempt under RCW 82.87.050 — stay out for good. The real-estate exclusion is only as wide as §302(1): short-term gain, dealer property, and recapture taxed as ordinary income are never subtracted and stay in the income tax base. And the add-back applies only in years you actually owe capital gains tax.
Then §205 does the coordination: a nonrefundable credit against the income tax "for the amount of tax imposed on Washington capital gains for the same tax year," capped at the income tax due, with no carryforward and no refund.
Net effect: when the §302(3) addback applies, calculate it under the statute and then apply the §205 capital gains tax credit against the income tax. Ignoring other credits, the combined bill equals the larger of the capital gains tax and pre-credit income tax. If no capital gains tax is owed, the §302(3) addback does not apply.
What that does to real numbers
The following examples illustrate the enacted 2028 framework using an assumed $278,000 capital gains standard deduction, the published 2025 amount, rather than a forecast of the inflation-adjusted 2028 deduction. Assume full-year Washington residents, fully taxable IRA distributions where applicable, nonexempt Washington-allocated long-term gains, the full $1 million income-tax standard deduction, and no other adjustments, deductions, or credits except the §205 credit. First, take a senior tech employee with $1,250,000 of wages and RSU vesting, plus a $400,000 long-term capital gain on shares held after vesting.
Capital gains tax: $400,000 minus the $278,000 standard deduction leaves $122,000 taxable at 7% — $8,540.
Income tax: §302 strips the $400,000 gain, then adds back $122,000 + $278,000 = the full $400,000. Washington base income: $1,650,000. After the $1 million standard deduction, $650,000 is taxable at 9.9% — a tentative $64,350. The §205 credit subtracts the $8,540 of capital gains tax paid, leaving $55,810 of income tax.
Total Washington tax: $64,350 — exactly 9.9% of every dollar above $1 million.
Under these assumptions, separately taxing ordinary income above $1 million at 9.9% and taxable capital gains at 7% would produce $33,290 ($24,750 + $8,540). The required addback and credit instead produce $64,350. In this example, the income tax is the larger calculation. That does not establish a universal 9.9% marginal rate on long-term gains: if no Washington capital gains tax is owed, the gain addback does not apply, and if the capital gains tax exceeds the pre-credit income tax, the capital gains tax determines the combined bill, ignoring other credits.
A second example uses the same assumptions: $800,000 of taxable IRA distributions plus a $500,000 long-term gain. Capital gains tax is 7% on $222,000, or $15,540. The gain returns to the income tax base, producing $1.3 million of Washington base income. After the $1 million standard deduction, Washington taxable income is $300,000 and pre-credit income tax is $29,700. Subtracting the $15,540 credit leaves $14,160 of income tax, for $29,700 combined. Under these assumptions, the IRA distributions alone would not produce income tax; the gain addback brings base income above the deduction.
Losses, charitable deductions, and credits
- Long-term loss harvesting can reduce the gain addback. Section 302 removes long-term gains and reverses long-term losses included in federal AGI. A deductible long-term loss can still reduce Washington capital gains subject to tax under chapter 82.87, after its allocation rules and adjustments, and thereby reduce the §302(3) addback. If no Washington capital gains tax is owed for the year, that addback does not apply. This can lower the income-tax calculation, but the resulting combined tax must also reflect the smaller capital gains tax credit. A long-term loss deducted against ordinary income on the federal return is added back under §302(2); it does not directly shelter Washington ordinary income. Short-term gains and losses are not removed by §302(1) or (2), so their effect through federal AGI must be analyzed separately.
2. Charitable giving counts against both taxes. §302(3) adds back the taxable gain plus only the 82.87.060(1) standard deduction. Amounts sheltered by the capital gains charitable deduction (RCW 82.87.060(4), defined at RCW 82.87.080) are never added back — so a qualifying charitable gift reduces your capital gains tax and shrinks your income tax base. One gift, two regimes.
3. The credit ordering question is open. ESSB 6346 creates four credits — other-state income taxes (§203), B&O tax (§204), capital gains tax (§205), and pass-through entity tax (§206) — each capped at "the tax otherwise due," with no stacking-order rule. For taxpayers combining a PTE election with a liquidity event, the sequencing can change the answer. Expect Department of Revenue guidance; until then, model the credits in the order least favorable to you before you rely on a number.
What this means before 2028
For Washington tax planning, compare the actual recognition years and the taxpayer’s other income. Before 2028, the capital gains tax applies at 7% on the first $1 million of taxable Washington gain and 9.9% above it. From 2028, calculate both taxes, the gain addback where applicable, and available credits. Moving a gain into an earlier year does not necessarily reduce combined Washington tax; the result depends on the complete calculation. Planning options — timing, QSBS qualification, charitable giving, and domicile — are discussed in the Before 2028 planning guide, and you can model your own numbers with the Washington tax calculator, which implements the §302/§205 mechanics described here.
This is general information, not legal advice. If you're facing a liquidity event in the 2026–2028 window, book a call or get the Washington State Tax Planning Guide.
