Washington state enacted a capital gains tax in 2022. It survived legal challenges and is now in full effect. The tax applies to long-term capital gains from the sale of certain assets, but it has a high threshold and many exemptions.
The short answer is that the Washington capital gains tax is 7 percent on the first $1 million of capital gains above $250,000 per year, and 9.9 percent on gains exceeding $1 million. Most people will never pay this tax because the threshold is so high. But for those selling a business, real estate, or a large stock portfolio, the tax is a significant consideration.
What is the Washington capital gains tax?
The Washington capital gains tax is an excise tax on the sale or exchange of certain long-term capital assets. It is not an income tax. That distinction is important because the Washington state constitution has been interpreted to prohibit a graduated income tax. The state supreme court upheld the capital gains tax as an excise tax on the sale of assets, not a direct tax on property or income.
The tax applies only to individuals. Trusts and estates are also subject to the tax. Corporations, partnerships, and LLCs are not directly taxed, but their owners may be taxed on their share of capital gains.
The current rates are as follows.
For the portion of long-term capital gains between $250,001 and $1 million, the tax rate is 7 percent.
For the portion of long-term capital gains exceeding $1 million, the tax rate is 9.9 percent.
There is a standard deduction of $250,000 per individual per year. That means the first $250,000 of capital gains are completely tax-free. Only gains above that threshold are taxed.
For married couples, the deduction is still $250,000 per couple. There is no doubling for joint filers. A married couple filing jointly gets the same $250,000 deduction as a single person.
Who pays the tax?
You pay the Washington capital gains tax if you are a Washington resident and you have long-term capital gains exceeding $250,000 in a single year. You also pay if you are a nonresident but you sold assets that are located or used in Washington.
The tax applies to individuals who are domiciled in Washington. If you live in Washington for more than 183 days of the year, you are generally considered a resident for tax purposes.
For part-year residents, the tax applies only to capital gains realized while you were a Washington resident. The $250,000 deduction is prorated based on the number of days you were a resident.
For nonresidents, the tax applies to capital gains from the sale of assets that have a situs in Washington. That includes real estate located in Washington and tangible personal property used in Washington. It does not include stocks or bonds, which are considered intangible property with no physical location.
What assets are subject to the tax?
The tax applies to long-term capital gains from the sale of several types of assets.
Stocks and bonds are covered. If you buy shares of Apple stock, hold them for more than one year, and sell them at a profit, the gain is subject to the Washington capital gains tax if your total gains exceed $250,000.
Mutual funds and exchange-traded funds are also covered. The same rules apply. Gains from selling fund shares held for more than one year count toward the threshold.
Business interests are covered. If you sell your ownership stake in a partnership, LLC, or S corporation, the gain is subject to the tax. There are special rules for qualified family-owned small businesses, which I will explain later.
Real estate is covered, but with an important exception. Capital gains from the sale of residential real estate are exempt if you have lived in the home for at least two of the last five years. That is the same as the federal primary residence exclusion. The Washington exemption applies to gains up to $250,000 for single filers and $500,000 for married couples, matching the federal rules. Gains above those amounts are subject to the Washington tax.
Timber and agricultural land have special rules as well. Gains from the sale of timber are generally exempt. Gains from the sale of agricultural land may be exempt if the land is used for farming and certain conditions are met.
What assets are exempt?
The Washington capital gains tax has a long list of exemptions. Many of the most common types of capital gains are completely excluded.
Retirement accounts are fully exempt. This includes gains from selling assets inside a 401(k), IRA, Roth IRA, pension plan, or any other qualified retirement account. You do not pay Washington capital gains tax on distributions from these accounts. You also do not pay the tax on gains realized inside the account before withdrawal.
Residential real estate is exempt up to the federal limits. As mentioned, if you sell your primary residence and meet the two-out-of-five-year ownership and use test, gains up to $250,000 for single filers and $500,000 for joint filers are exempt. Gains above those limits are taxable.
Agricultural land is exempt if the land is used for farming and has been designated as agricultural land by the county assessor. The exemption applies to the sale of the land itself, not to the sale of crops or livestock.
Timber is exempt. Gains from the sale of timber harvested from Washington land are not subject to the tax. This exemption is intended to support the forestry industry.
Commercial fishing vessels are exempt. Gains from the sale of a commercial fishing vessel that is used primarily in Washington waters are not taxed.
Certain family business sales are partially exempt. If you sell a qualified family-owned small business that has been owned and operated by the same family for at least ten years, up to $10 million of the gain may be exempt. This is a complex exemption with many requirements, but it is important for business owners.
Gains from the sale of assets that are already subject to another Washington excise tax are exempt. For example, if you sell real estate and pay Washington real estate excise tax, that gain is not also subject to the capital gains tax. The state does not double-tax the same transaction.
Gains from the sale of assets that are taxed by another state are eligible for a credit. If you pay capital gains tax to another state on the same gain, you can claim a credit against your Washington tax liability. The credit is limited to the amount of tax paid to the other state.
How is the gain calculated?
The Washington capital gains tax starts with your federal capital gains calculation. You use the same adjusted basis, same holding period, and same sale price that you report to the IRS.
There are a few adjustments. You can deduct any investment advisory fees that are directly related to producing the capital gain. You can also deduct certain legal fees and transaction costs that are not already deducted on your federal return.
You cannot deduct capital losses from other years. Washington does not allow loss carryforwards. If you have a capital loss in one year, you cannot use it to offset gains in a future year. You also cannot use losses from the sale of exempt assets to offset gains from taxable assets.
You can, however, deduct capital losses realized in the same tax year. If you have $300,000 of gains from selling one stock and $100,000 of losses from selling another stock, your net gain is $200,000. That is below the $250,000 threshold, so you owe no tax.
The calculation is done on a net basis for the entire tax year. You add up all your capital gains from taxable assets, subtract all your capital losses from taxable assets, and then subtract the $250,000 standard deduction. The remaining amount is your taxable capital gain.
Filing requirements and deadlines
If your total capital gains from taxable assets exceed $250,000 in a calendar year, you must file a Washington capital gains tax return. The return is due on the same date as your federal income tax return, which is generally April 15. You can request an extension, but any tax owed must be paid by the original due date to avoid penalties and interest.
You file using the Washington Capital Gains Tax Return, which is Form W-1. The form is available on the Washington State Department of Revenue website. You can file electronically through the department's online portal.
The return requires you to report each transaction that generated a capital gain. You need to provide the date of sale, the sale price, your adjusted basis, and the amount of gain. You also need to report any capital losses and any exemptions you are claiming.
You do not need to file a return if your capital gains are below $250,000. Even if you have no tax liability, you do not need to file a zero return. You only file if you owe tax.
How the tax interacts with federal taxes
The Washington capital gains tax is not deductible on your federal return. The federal state and local tax deduction, known as SALT, allows you to deduct state income taxes or state sales taxes. The Washington capital gains tax is an excise tax, not an income tax. The IRS has not issued clear guidance on whether it is deductible. Most tax professionals believe it is not deductible, but the issue is not settled.
Your federal capital gains tax rate is separate and in addition to the Washington tax. If you sell a stock at a profit, you pay federal capital gains tax at rates of 0, 15, or 20 percent depending on your income. You also pay Washington capital gains tax at 7 or 9.9 percent on the portion above $250,000. The two taxes are completely separate.
There is no double taxation issue with other states because Washington offers a credit for taxes paid to other states. If you pay capital gains tax to California on the same gain, you can credit that amount against your Washington tax. You cannot credit federal tax, only tax paid to another state.
Planning strategies
If you have significant capital gains, there are ways to reduce or avoid the Washington capital gains tax.
The most straightforward strategy is to realize gains over multiple years. If you have $500,000 of gains, you could sell half in December and half in January. That would put $250,000 of gains in each tax year, and both years would fall below the $250,000 threshold. You would owe no tax.
You can also harvest losses. If you have gains in one stock and losses in another, selling the losing stock can offset the gains. The losses must be realized in the same tax year. You cannot carry losses forward or backward.
You can hold assets until death. Under current law, capital gains are not taxed at death. Your heirs receive a stepped-up basis, meaning the original gain is never taxed. This is a federal rule, and Washington follows the same treatment. If you hold a highly appreciated asset until you die, the Washington capital gains tax never applies.
You can move to another state. If you are planning a large sale, you could establish residency in a state with no capital gains tax, such as Texas or Florida. You need to be careful. The Washington Department of Revenue looks closely at residency changes. If you move but maintain strong ties to Washington, the department may argue that you are still a resident.
You can use the family business exemption. If you are selling a family-owned small business that has been in the family for at least ten years, up to $10 million of the gain may be exempt. This is a valuable exemption for business owners, but it has many requirements. You should work with a tax professional to qualify.
How the tax has changed since enactment
The capital gains tax was enacted in 2022 as part of Senate Bill 5096. The original rate was 7 percent on gains above $250,000, with no higher bracket. In 2026, the legislature added the 9.9 percent bracket for gains exceeding $1 million.
The tax was challenged in court immediately. Opponents argued that it was an unconstitutional income tax. The case went to the Washington Supreme Court, which upheld the tax in a 7-2 decision in 2023. The court ruled that the tax is an excise tax on the sale of assets, not a direct tax on income.
A second legal challenge was filed in 2024, arguing that the tax violates the uniformity clause of the state constitution. That case is still pending as of 2026. Most observers expect the tax to survive, but the outcome is not certain.
The state has collected roughly $1.5 billion from the tax since its enactment. Revenues have been higher than originally projected because asset prices have risen faster than expected.
Frequently Asked Questions (FAQ)
How to avoid capital gains tax in Washington state?
You can avoid Washington capital gains tax in several ways. Keep your total capital gains under $250,000 per year, as the first $250,000 is exempt. Hold assets until death, as heirs receive a stepped-up basis and never pay the tax. Sell your primary residence, which is exempt up to $250,000 for single filers or $500,000 for married couples. Realize losses in the same year to offset gains. Sell assets over multiple years to stay under the threshold. Move to a state with no capital gains tax before selling. Or invest through retirement accounts like a 401(k) or IRA, which are fully exempt.
Do I have to pay capital gains if I sell my house in Washington state?
Probably not. If the house is your primary residence and you have lived in it for at least two of the last five years, you can exclude up to $250,000 of gain for a single person or $500,000 for a married couple. Most home sales fall under these limits. If your gain exceeds those amounts, the excess is subject to the Washington capital gains tax. If the house is a rental property or a vacation home, you do not get the exemption and you will owe the tax on any gain above $250,000.
What is the Washington state capital gains tax rate?
The Washington capital gains tax rate is 7 percent on the portion of long-term capital gains between $250,001 and $1 million. The rate is 9.9 percent on the portion of gains exceeding $1 million. The first $250,000 of capital gains per year are exempt.
Who pays the Washington capital gains tax?
Individuals who are Washington residents and have long-term capital gains exceeding $250,000 in a single year must pay the tax. Trusts and estates are also subject to the tax. Nonresidents pay the tax on gains from the sale of real estate or tangible property located in Washington.
What assets are subject to the Washington capital gains tax?
The tax applies to long-term capital gains from the sale of stocks, bonds, mutual funds, business interests, and real estate that is not a primary residence. Retirement account gains are exempt. Primary residence gains are exempt up to $250,000 for single filers and $500,000 for joint filers.
Are retirement accounts subject to the Washington capital gains tax?
No. Gains from assets held inside a 401(k), IRA, Roth IRA, pension plan, or other qualified retirement account are fully exempt from the Washington capital gains tax. This includes both gains realized inside the account and distributions from the account.
Does the Washington capital gains tax apply to the sale of a primary residence?
Only partially. If you sell your primary residence and meet the federal two-out-of-five-year ownership and use test, gains up to $250,000 for single filers and $500,000 for joint filers are exempt. Gains above those amounts are subject to the tax. Most homeowners will never exceed these limits.
How do I file the Washington capital gains tax return?
You file Form W-1, the Washington Capital Gains Tax Return, with the Washington State Department of Revenue. The return is due on April 15, the same day as your federal return. You can file electronically through the department's online portal. You only need to file if your capital gains exceed $250,000.
What is the standard deduction for the Washington capital gains tax?
The standard deduction is $250,000 per individual per year. For married couples, the deduction is still $250,000 per couple. There is no doubling for joint filers. The deduction is adjusted for inflation each year, but increases have been small.
Can I deduct capital losses from previous years?
No. Washington does not allow capital loss carryforwards. You can deduct capital losses realized in the same tax year, but you cannot use losses from prior years to offset gains in the current year. You also cannot carry unused losses forward to future years.
Does the Washington capital gains tax apply to nonresidents?
Yes, but only on gains from assets that have a situs in Washington. That includes real estate located in Washington and tangible personal property used in Washington. It does not include stocks or bonds, which are considered intangible property with no physical location.
Is the Washington capital gains tax being challenged in court?
Yes. A legal challenge filed in 2024 is still pending as of 2026. The challengers argue that the tax violates the uniformity clause of the Washington state constitution. The Washington Supreme Court upheld the tax in a 2023 ruling on different grounds, but the new challenge raises different issues. The outcome is uncertain.