On May 4, 2021, Washington Governor Jay Inslee signed ESB 50956 (“Act”) into law establishing a state tax on long-term capital gains, effective January 1, 2022.
What is being taxed?
The tax is on Washington capital gains. The act defines capital gains as an individual’s net long-term capital gains for federal income tax purposes, subject to certain adjustments. Transactions that do not result in gains that are subject to federal income tax, such as tax-free mergers, tax-free contributions to corporations and partnerships, and gains from the sale of qualified small business stock (“QSBS”) are not subject to the tax.
What is the tax rate?
The new law imposes a tax rate of 7 percent on an individual’s Washington long-term capital gains.
When does the tax take effect?
The tax becomes effective on January 1, 2022.
Are there exemptions from the tax?
- All sales of real estate (as defined by the Act).
- Gains from the sale of any interest in a privately held entity to the extent attributable to real estate owned directly by the entity.
- Gains from certain eligible assets; assets held in retirement accounts, certain depreciable property used in a trade or business, timber and timberlands, commercial fishing privileges, and goodwill from the sale of an auto dealership, assets transferred in condemnation proceedings, and certain breeding livestock.
Are there deductions against the tax?
- $250,000 deduction, per individual (Note: married individuals are treated as one individual whether filing separately or joint). This means that if you have net long-term capital gains below $250,000, you will have no tax.
- Certain charitable contributions to the extent such contributions exceed $250,000. The maximum allowable charitable contribution is $100,000.
- Gains from the sale of certain interests in qualified family-owned businesses.
Will the tax be challenged?
Yes, a new lawsuit asserts that the tax is a personal income tax that violates both the Washington State and U.S Constitutions.
Our team will continue to monitor developments and share more updates as they become available. Please contact your tax advisor if you have any questions that apply to your personal situation.
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