On May 4, 2021, Governor Inslee signed Senate Bill 5096 into law, creating a tax on certain capital gains in the State of Washington. The law imposes a 7% tax on capital gains over $250,000 in a calendar year, starting in 2022, based on information reported on a federal individual tax return, regardless of filing status.
Exemptions. Gains on the sale of real estate, tangible property used in a trade or business, livestock, timber, commercial fishing, and family-owned small businesses are exempt from the tax, even if the gain is over the $250,000 threshold. Gains on sales of intangible assets held in retirement accounts are also exempt.
Gains over the $250,000 threshold on the sale of stocks and bonds will be taxable for all Washington individuals. For tangible property that is not explicitly exempt, gain upon sale may be subject to the capital gains tax, depending on residency status and property location. The capital gains tax will be levied on all Washington individuals, but not on corporations. Gains that are recognized in pass through entities (such as partnerships or S Corporations) and passed through to individuals will be taxable to the individuals.
Although the tax is projected to be levied on less than 0.1 % of Washington residents, and is imposed only on certain capital gains, Washington’s Constitution includes provisions that raise questions about the constitutionality of the new capital gains tax. Two groups have already filed lawsuits attempting to overturn the legislation. Freedom Foundation filed suit on behalf of a group of individuals on April 28th, and the Opportunity for All Coalition filed a second lawsuit on May 20th.
While we do not know how the outcome of these lawsuits will affect the tax in 2022, knowledge of the various provisions of Senate Bill 5096 will help you plan for the future. We will continue to post to our blog as updates on this new tax become available. Because this new tax is relatively complicated, please contact us before you realize any capital gains or if you have future plans that could trigger this tax.