Washington legislators have introduced SB 6229, a bill that directly addresses how Washington’s capital gains tax applies to Section 1202 qualified small business stock (QSBS). While narrow on its face, the bill matters to founders, early employees, and investors who assumed that federal QSBS treatment cleanly carried over to Washington.
The background
Section 1202 allows eligible taxpayers to exclude up to 100% of gain on the sale of qualified small business stock for federal income tax purposes, subject to various requirements and caps. For years, many Washington taxpayers assumed that QSBS gains were also effectively excluded from Washington tax simply because Washington did not impose a broad income tax.
That assumption became more fragile after Washington enacted its 7% capital gains tax, which is structured as an excise tax and does not automatically conform to federal income tax exclusions.
What SB 6229 does
SB 6229 explicitly addresses long-term capital gain from the sale of Section 1202 stock. In effect, the bill confirms that Washington will not recognize the federal Section 1202 exclusion when determining Washington capital gains tax liability.
In plain terms:
- A gain that is fully excluded under federal law may still be taxable in Washington
- Section 1202 does not shield taxpayers from Washington’s capital gains tax
- The federal–state mismatch is intentional, not an oversight
This resolves lingering ambiguity, but not in a taxpayer-friendly way.
Why this matters
For founders and early investors, QSBS planning often assumes a holistic tax benefit. SB 6229 reinforces that QSBS is now a federal-only benefit for Washington residents.
This has several practical consequences:
- Liquidity planning should account for Washington capital gains exposure, even on QSBS exits
- Estate planning and gifting strategies may need adjustment
- Modeling “after-tax” outcomes based solely on federal law is no longer sufficient
For high-value exits, a 7% state-level haircut is not trivial.
The bigger picture
SB 6229 fits a broader pattern: Washington is incrementally tightening its capital gains regime while decoupling from federal concepts when convenient. That trend increases complexity and makes proactive planning more important.
Founders and investors should not assume that favorable federal tax treatment will be respected at the state level—especially in Washington.
Takeaway
If you hold or expect to receive Section 1202 stock and are subject to Washington tax, SB 6229 should be treated as a clear signal:
QSBS remains powerful federally, but it is no longer a Washington tax solution.
If you are modeling exits, evaluating secondary sales, or doing long-term planning, Washington capital gains tax must now be part of the analysis.
This post is for general informational purposes only and does not constitute tax or legal advice.
