WASHINGTON STATE CAPITAL GAINS TAX
The Washington State Supreme Court has ruled that the excise tax on capital gains is constitutional and valid. As such, the Department of Revenue will continue collecting the tax which is due April 18, 2023. A filing extension will be granted if the taxpayer files a federal extension and requests a Washington extension prior to the original due date, but the tax must still be paid in full by April 18th (April 15th in future years). Any tax paid after that date is subject to a late payment penalty of up to 29% of the tax due.
Background
In 2021, the Washington State Legislature passed a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, cryptocurrency, business interests, art and collectibles, and other tangible assets.
Who It Applies To
This tax only applies to individuals, and not on business entities. Individuals includes beneficial owners of a passthrough entity, such as a partnership, limited liability, company, or S corporation.
Deductions and Exemptions
The following deductions apply:
·A standard deduction of $250,000 per year per individual, married couple, or domestic partnership. This amount is adjusted for inflation annually. So only gains in excess of that amount are subject to tax.
·The long-term capital gain from an individual’s sale of all or substantially all of a qualified family-owned small business. Federal income tax law provides up to a $10 million gain exclusion for sales of “Qualified Small Business Stock” (QSBS) provided certain holding period and other requirements are met. Since federal long term capital gains are the starting point for calculating the Washington tax, Washington will implicitly allow this exclusion in the year it is recognized for federal tax purposes. A separate deduction from the Washington capital gains tax is available for gains from the sale of a “qualified family-owned small business (QFOSB).”
·Charitable donations in excess of $250,000 per year per individual. The charitable donations deduction cannot exceed $100,000 per year per individual. These amounts are adjusted for inflation annually.
·Long term losses can be netted against long term capital gains; however, since Washington only taxes long term capital gains, short term gains or losses are simply ignored in calculating the tax. You can also apply capital loss carryovers, but the carryover is limited to the amount of capital loss carryover utilized in calculating federal net long term capital gain and is further reduced if any of the carryover was generated from transactions sourced outside of Washington.
The sale or exchange of the following assets are exempt from the Washington capital gains tax:
·Real estate.
·Interests in a privately-held entity to the extent that the capital gain or loss from such sale or exchange is directly attributable to the real estate owned directly by such entity.
·Assets held in certain retirement accounts.
·Generally speaking, taxpayers who report a sale on the installment method for federal tax purposes will report the long term gain to Washington as the installment payments are received. However, if the original sale took place prior to 2022, the Washington Department of Revenue has issued guidance that none of the installment payments are subject to the Washington tax.
·Assets subject to condemnation, or sold or exchanged under imminent threat of condemnation.
·Certain livestock related to farming or ranching. Assets used in a trade or business to the extent those assets are depreciable under Title 26 U.S.C. Sec. 167(a)(1) of the internal revenue code or qualify for expensing under Title 26 U.S.C. Sec. 179 of the internal revenue code.
·Timber, timberlands, and dividends and distributions from real estate investment trusts derived from gains from the sale or exchange of timber or timberlands.
·Commercial fishing privileges.
·Goodwill received from the sale of a franchised auto dealership.
It is important to understand the applications of the tax. If you have questions on determining your Washington state tax responsibility, please contact your Advisor and we’ll be happy to help.
Source: (1) Department of Revenue Washington State. https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax.
Views expressed are as of the date indicated and are not intended to serve as investment advice, tax advice, a recommendation, offer, or solicitation to buy or sell any securities; they are based on the information available at the time and are subject to change based on economic, capital market, and other conditions. Any investment decision should be based on an individual’s own goals, time horizon, and tolerance for risk.
Prior performance does not guarantee future results and there is the potential for the loss of your capital investment.
Information and data provided have been obtained from sources deemed reliable but are not guaranteed.
