The highly anticipated Supreme Court ruling is here: Washington’s excise tax on long-term capital gains is here to stay. The 7% excise tax on long-term capital gains, effective for sales or exchanges of capital assets on or after January 1, 2022, requires first payments for the tax on or before April 18, 2023.
Who does Washington’s new capital gains tax apply to?
The Washington capital gains tax applies only to individuals who own long-term capital assets. If an asset is owned by a passthrough entity or a disregarded entity that the individual owns, they are considered a beneficial owner of the asset and are subject to the tax.
How to figure out how much you owe
The new tax is a tax on the money you make from selling things you’ve owned for a long time (like stocks or property), but only if you live in Washington.
To figure out how much you owe, take your total profits from selling these long-term assets (which you also report on your federal tax return) and make the following adjustments:
- Calculate your federal net long-term capital gain for the tax year.
- Identify any long-term capital losses from sales or exchanges that are exempt or not allocable to Washington.
- Add back the long-term capital losses from step 2 to your federal net long-term capital gain.
- Identify any long-term capital gains from sales or exchanges that are exempt or not allocable to Washington.
- Subtract the long-term capital gains from step 4 from the amount calculated in step 3. This will give you your adjusted capital gains.
- Apply any allowable deductions and exemptions to your adjusted capital gains.
The result is the amount of capital gains allocated to Washington that are subject to the new tax.
Are there any deductions or exemptions?
Though the new tax applies only to individuals, not businesses, there are some deductions you can use to lower the amount of tax you owe. For example, everyone gets a standard deduction of $250,000; so, whether filing jointly or as an individual, you will receive the same deduction amount. There are also deductions for things like selling a small business or making charitable donations. As a reminder, you don’t have to pay the Washington capital gains tax on the profits or losses you make from selling your house, or from long-term investments you hold in your retirement accounts like IRAs or 401(k)s.
How to allocate capital gains and losses
If you live in Washington when you sell or exchange intangibles—think stocks, patents, trademarks, etc.—any money you make or lose from that sale will potentially be subject to this tax.
If you sell tangible personal property, the gain or loss on that sale is allocated to Washington if the property is in Washington at any point during the tax year. If you are a resident of Washington when you sell the item and you are not paying taxes on that sale to another jurisdiction, then you may have to pay tax on the sale in Washington. “Jurisdiction” means not only other states and territories but also other countries.
What tax credits are available?
If you pay taxes on capital gains in another place outside of Washington state, you may be able to apply a credit on your Washington capital gains tax. In addition, if the same gain is subject to the Washington business and occupation tax, you can use the capital gains tax to reduce your B&O tax.
What’s the process of filing the new capital gains tax return?
You don’t have to file a Washington capital gains tax return unless you owe tax. If you do, it must be filed before the deadline of your federal income tax return, including extensions. However, you need to pay the tax by the original due date of your income tax return, not including extensions—in this case, April 18, 2023. All filing and payments must be done electronically via the Washington Department of Revenue’s “MyDOR” portal.
Taxpayers that owe Washington capital gains tax must make payment on or before April 18, 2023, (no extension allowed) and either file returns by then or apply for a six-month filing extension.
- Though this tax will mostly impact Washington residents, it’s essential to know that people who lived in Washington 183 days or more during the taxable year could also be affected if they sell or exchange tangible personal property located in Washington and their capital gains are allocated to the state. We anticipate that this case will be challenged in federal court as a violation of the commerce clause in the U.S. Constitution.
- There are still many issues and unknowns with the implementation and the filing systems. We do not anticipate that the Washington DOR will go through any additional rulemaking for this tax season.