Last updated: May 18, 2026
Washington has no personal income tax — yet. But it does have a standalone capital gains tax that hits founders, investors, and high earners hard at exit. Understanding this tax — and its interaction with QSBS, residency rules, and the new 9.9% income tax arriving January 1, 2028 — is essential planning for anyone facing a liquidity event in Washington.
What Is Washington's Capital Gains Tax?
Washington's capital gains tax is a standalone excise tax on long-term capital gains realized by individual taxpayers. The tax was enacted in 2021, took effect in January 2022, and was upheld by the Washington Supreme Court in Quinn v. State, 1 Wn.3d 453, 526 P.3d 1 (2023). The U.S. Supreme Court denied certiorari in January 2024. The tax is structured as an excise — a tax on the privilege of selling assets — rather than as a tax on income, a structural choice the legislature made to avoid the constitutional uniformity-clause problem that has historically defeated Washington income tax proposals.
Rates and Thresholds (2026)
- 2025 standard deduction: $278,000, indexed annually for inflation (the 2026 indexed amount has not yet been published by the Washington DOR as of this update)
- 7% on long-term capital gains between the standard deduction and $1 million
- 9.9% on long-term capital gains exceeding $1 million
The 9.9% tier was added by SB 5813, signed by Governor Ferguson on May 20, 2025, retroactive to January 1, 2025. The $1 million threshold is not indexed for inflation — meaning more taxpayers will hit the higher tier each year.
Note: This 9.9% capital-gains tier is part of the existing capital-gains excise tax. It is separate from the new 9.9% income tax (ESSB 6346) scheduled to take effect January 1, 2028, and the two taxes are governed by different statutory frameworks even though they share a rate.
Who Pays the Tax?
The tax is imposed on individuals, not on corporations or LLCs directly. Pass-through gains, however, flow to the owners and count toward each owner's threshold. For married couples and registered domestic partners, the deduction and threshold rules require careful modeling — do not assume a sale can simply be split into two separate $1 million capital-gains tiers without reviewing filing posture, ownership, and Washington sourcing rules.
What Gains Are Subject to the Tax?
Long-term capital gains from the sale or exchange of:
- Stocks, bonds, and other securities
- Business interests (LLC interests, partnership interests, S-corp stock)
- Tangible personal property held for investment
What Gains Are Exempt?
- Real estate — direct sales of real property are excluded (but entity sales whose assets include real estate may not be)
- Retirement accounts — distributions from IRAs, 401(k)s, and similar plans
- Certain agricultural property
- Family-owned small business sales meeting specific conditions
- QSBS gains excluded under federal Section 1202 — for now (see below)
QSBS and Washington's Capital Gains Tax
Federal QSBS exclusion piggybacks into Washington's tax base. If you exclude a gain under Section 1202, Washington does not separately tax it — because the excluded gain never enters Washington's starting tax base. Washington computes its tax beginning with the taxpayer's federal long-term capital gain as reported on the federal return; gains excluded under Section 1202 are excluded before the federal return is filed, so they simply are not in the number Washington taxes.
That said, this is statutory conformity, not constitutional protection. Nothing in Washington's constitution requires the state to piggyback on federal AGI, and the legislature can change that at any time. SB 6229 in the 2026 session would have done exactly that — explicitly adding back federally excluded QSBS gains. It did not pass, but it came close enough to treat as a genuine warning shot.
→ Full guide: Washington's Capital Gains Tax and QSBS
Residency Planning: Can You Move to Avoid the Tax?
For founders approaching a liquidity event, residency planning has become one of the highest-stakes tax issues in the entire transaction. Washington's residency rules under RCW 82.87.020 create two independent pathways to taxation:
- Domicile-based residency — a fact-driven inquiry into where you actually live, intend to remain, and treat as your permanent home.
- Statutory residency — maintaining a place of abode in Washington and being physically present in the state more than 183 days in the year.
A founder can trigger one without triggering the other. Both have to be analyzed independently. Late-stage relocations — moves attempted in the weeks before closing — are particularly risky and require careful documentation.
→ Full guide: Residency Planning Before You Sell
The Charitable Deduction Has a Hidden Catch
Washington's capital gains tax includes a charitable deduction under RCW 82.87.080 — but only for donations to "qualified organizations" that are eligible under IRC §170(c) and have their principal office in Washington. This is not a standard federal charitable deduction rule. It matters most for donor-advised funds: in Washington, the relevant organization is the DAF sponsor (Fidelity, Vanguard, Schwab, etc.), not the ultimate charity — and the major national DAF sponsors are not Washington organizations.
→ Full guide: Washington Capital Gains Tax Charitable Deduction
The Tax Stack: What Happens in 2028
On January 1, 2028, Washington's new 9.9% income tax (ESSB 6346) takes effect on income above $1 million per household. This is a separate tax from the capital gains excise — a true income tax under a separate statutory framework. High earners with both wage and gain income will face overlapping exposures, and the planning calculus for 2026–2027 sales now has to account for what the world will look like in 2028 and after.
→ Full guide: Washington's 9.9% Income Tax (ESSB 6346)
Legislative Timeline
- 2021: Original capital gains tax enacted
- 2022: Tax takes effect
- 2023: Washington Supreme Court upholds tax in Quinn v. State
- 2024: U.S. Supreme Court denies certiorari
- 2025: SB 5813 adds 9.9% tier on gains over $1M, retroactive to January 1, 2025
- 2026: SB 6229 / HB 2292 (proposed QSBS add-back) fails to pass
- 2026: ESSB 6346 (9.9% income tax) enacted, effective January 1, 2028
Frequently Asked Questions
What is the Washington capital gains tax rate?
7% on long-term capital gains between the $278,000 standard deduction (2025, indexed) and $1 million; 9.9% on gains exceeding $1 million. The $1 million threshold is not indexed for inflation.
When did the Washington capital gains tax take effect?
The tax took effect January 1, 2022. The Washington Supreme Court upheld it in Quinn v. State in 2023. The 9.9% tier on gains above $1 million was added by SB 5813 in 2025, retroactive to January 1, 2025.
Is real estate subject to Washington's capital gains tax?
No. Direct sales of real estate are exempt from the tax. But sales of entities whose assets include real estate may be subject, and dealers in real property may be treated differently.
Are QSBS gains subject to Washington's capital gains tax?
Generally no. Washington piggybacks on federal capital gain as reported on the federal return, and Section 1202 excludes the qualifying gain before it reaches the federal return. But this is statutory conformity, not constitutional protection — SB 6229 in 2026 would have changed it, and similar legislation is likely to return.
Can I avoid Washington's capital gains tax by moving out of state?
Possibly — if you change both your domicile and your statutory residency under RCW 82.87.020 before the sale closes. Both tests apply independently. Late-stage relocations are risky and require careful documentation.
Did Washington's capital gains tax survive court challenges?
Yes. The Washington Supreme Court upheld the tax as a constitutional excise tax (not a property tax on income) in Quinn v. State, 1 Wn.3d 453 (2023). The U.S. Supreme Court denied certiorari in January 2024.
Have questions about your specific situation?
Joe Wallin is a startup and tax attorney with 25+ years of experience advising founders and investors on Washington tax planning, QSBS, and equity compensation. Book a free 20-minute call to discuss your situation.
