Washington Supreme Court Affirms Capital Gains Tax

By: Michael Safren, Esq.

The Washington Supreme Court affirmed the constitutionality of a statewide capital gains tax on March 24, 2023 by a 7 to 2 decision.  The statewide capital gains tax, which was enacted in 2021, was affirmed as constitutional after a lower court had ruled that the tax was unconstitutional. The capital gains tax, which went into effect on January 1, 2022, will be enforced by the Washington Department of Revenue, with first payments due on or before April 18, 2023.

The tax imposes a capital gains tax on the sale or exchange of a capital asset that would result in a capital gain.  The law is significant because it applies to all Washington residents, with limited exceptions for those who maintained an abode outside of Washington and did not spend more than 30 days within Washington during the tax year.

Starting on January 1, 2022, a seven percent (7%) capital gain tax would apply to all long-term capital gains after the applying a standard $250,000 deduction.  The deduction is the same for both individuals and married couples.  Certain types of property are specifically excluded from the tax including i) all real estate land and structures; ii) assets held in a retirement account; iii) assets transferred as part of a condemnation proceeding; iv) livestock related to farming or ranching; v) certain types of property used in a trade or business such as machinery and equipment that have been immediately expensed; vi) timber and timberlands; vii) certain commercial fishing privileges; and viii) goodwill received from the sale of a franchised auto dealership.

Ultimately, the tax will mostly likely fall upon business owners that sell or exchange their business(es), trusts that sell or exchange taxable assets, estates that sell or exchange taxable assets, and individuals who sell taxable capital assets. 

If you are a business owner looking to sell your business, of if you are the administrator or executor of an estate or trust, you should consult with an experienced business attorney or an experienced probate and trust attorney who can help you avoid unnecessary taxes and protect your interests.  Such an attorney can advise you how to structure the transaction to avoid or minimize your tax burden.  They can also advise on how to qualify for available deductions and exemptions which can further minimize your tax obligation.  For example, within the law are several important carve-outs for “qualified small family businesses” which can reduce the taxable gain.  Further, the law allows for certain charitable donations to increase the standard deduction, thereby reducing the taxable amount.  Additionally, the gain on the asset is a function of the basis in the capital asset, so maximizing the allowable basis can minimize the taxable burden.

If you have questions about the new Washington Capital Gain Tax or how the capital gains tax laws will impact you, please contact our offices to discuss your individual concerns.

Michael Safren is a Partner at The Law Offices of Jenny Ling, PLLC.  His practice focuses on business, real estate, probate, and civil litigation.