Short answer: Washington's capital gains tax and the new 9.9% income tax never hit the same dollar twice. ESSB 6346 strips long-term capital gains out of the income tax base, adds back the gains Washington already taxes, and then credits the capital gains tax you paid against the income tax. The result: your gain bears the greater of the two regimes — not both stacked. But for high earners, "the greater" is usually 9.9%, not the 7% most people are modeling. Here's the machinery, with the statute and real numbers.
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 Washington taxable income above $1 million per household, starting from federal AGI.
The obvious fear is stacking: 7% + 9.9% = 16.9% on the same gain. The statute prevents that — but the way it prevents it changes the effective rate in a way most coverage misses.
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. Add those together and the full non-exempt gain is back in the income tax base. Gains that escape the capital gains tax — QSBS gains excluded under Section 1202 (which never reach AGI in the first place), real estate gains exempt under RCW 82.87.050 — stay out for good. 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: the gain enters the 9.9% income tax base in full, and the 7%–9.9% capital gains tax you paid comes off the income tax bill. You pay whichever regime is larger.
What that does to real numbers
Take a senior tech employee in 2028: $1,250,000 of wages and RSU vesting, plus a $400,000 long-term capital gain on shares held after vesting (not QSBS, not real estate).
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 household 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.
That's the point most modeling gets wrong. People compute 9.9% on ordinary income above $1M, plus 7% on the gain, and arrive at $35,250 for this fact pattern. The statute produces $64,350. Once your household income clears $1 million, the marginal rate on additional long-term gain is 9.9% — the 7% capital gains band is fully absorbed by the larger income tax through the add-back-and-credit machinery. The capital gains tax only "wins" when it's bigger: a taxpayer with a huge gain and little ordinary income (where the gain's 9.9% surtax tier outruns the income tax on the same base) pays the capital gains tax and the §205 credit zeroes out the income tax.
A second pattern, common for retirees: $800,000 of IRA distributions plus a $500,000 long-term gain. Capital gains tax: 7% on $222,000 = $15,540. The gain returns to the income tax base, so Washington taxable income is $1.3 million — $300,000 over the threshold, a tentative $29,700 — minus the $15,540 credit, leaving $14,160 of income tax. Total: $29,700. The retirement distributions alone would never have triggered the income tax; the gain dragged the household over the line.
Three things most coverage misses
1. Loss harvesting works — but only through the capital gains tax, and it can't shelter ordinary income. §302(1) and (2) neutralize long-term gains and losses out of federal AGI entirely; what enters the base is the §302(3) add-back of your chapter 82.87 taxable gain. So harvested losses still count, just indirectly: they reduce your federal net long-term gain, which reduces the Washington capital gains subject to tax under chapter 82.87, which shrinks the add-back. Harvest enough that you owe no capital gains tax at all and §302(3) drops out entirely — no add-back, not even the standard deduction. What harvesting cannot do is offset ordinary income: the federal rule allowing up to $3,000 of net capital losses against wages has no Washington analogue, because §302(2) reverses the loss back out. A loss-heavy year that wipes out your federal capital gains still leaves the full income tax on your wages, RSU vesting, and other ordinary income. (Short-term gains and losses are untouched by §302 — they land in the Washington base exactly as they land in federal AGI.)
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(2)) 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
The interaction sharpens the pre-2028 calculus rather than softening it. Gains recognized before January 1, 2028 face only the capital gains tax — 7% up to $1 million of taxable gain. The same gain recognized in 2028 or later, by a household over the $1 million income threshold, effectively bears 9.9% from the first dollar above the threshold. On a $5 million non-QSBS gain, the timing difference is real money. The full menu of levers — acceleration, QSBS qualification, charitable structuring, domicile — is 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.
One caveat that belongs in every post on this law: ESSB 6346 is under constitutional challenge in Klickitat County Superior Court. Plan as though it arrives on schedule; treat the litigation as a tail benefit, not a strategy.
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.
