Steven J. Rosenthal, CPA, CFP, JD
Washington Capital Gains Tax Revisited
The Washington State Supreme Court ruled on Friday, March 24, 2023, to uphold the constitutionality of the state’s capital gains tax as an “excise” tax. The ruling reversed a lower court decision striking down the tax as unconstitutional.
The tax imposes a 7% tax on the sale of financial assets by individuals, including stock and bonds, and applies to long-term capital gains over a $250,000 exemption. There is not much time left for taxpayers that incurred taxable capital gains in 2022 to file their returns. The first payments for the tax year 2022 are due on or before April 18, 2023.
To pay the tax, Washington residents or their tax preparers must do the following:
Log in or sign up for a Secure Access Washington (SAW) account to access Washington’s online system. The sign-up for SAW may be accessed here: https://secure.dor.wa.gov/home/Account/Register
Register for a capital gains tax account in My DOR. You will receive a welcome letter after registering.
Access the account by using the letter ID in your welcome letter.
File the return, make a payment, and/or request an extension in My DOR
The Washington State Department of Revenue has identified the following assets as exempt from the Washington capital gains tax:
Interests in a privately held entity to the extent that the capital gain or loss from such sale or exchange is directly attributable to the real estate owned by such entity.
Assets held in certain retirement accounts.
Assets subject to condemnation or sold or exchanged under imminent threat of condemnation.
Certain livestock related to farming or ranching.
Assets used in a trade or business to the extent those assets are depreciable under Title 26 U.S.C. Sec. 167(a)(1) of the internal revenue code or qualify for expensing under Title 26 U.S.C. Sec. 179 of the internal revenue code.
Timber, timberlands, and dividends and distributions from real estate investment trusts derived from gains from the sale or exchange of timber or timberlands.
Commercial fishing privileges.
Goodwill received from the sale of a franchised auto dealership.
There is significant controversy surrounding this Supreme Court ruling, and Washington has created an incentive for wealthy residents to leave the state. Even though the IRS and virtually all other states recognize capital gains as income, Washington State has determined that capital gains are taxable as an “excise,” We must plan our investment and retirement strategies accordingly.
The obvious planning strategy for Washington residents who wish to avoid this tax is to avoid triggering gains over the $250,000 exemption. It would also make sense to keep more assets in retirement accounts, especially Roth accounts, that would not be subject to the capital gains tax. Fulcrum Wealth Management can help investors navigate the capital gains tax to avoid or minimize the tax.
For a comprehensive review of your personal situation always consult with a tax of legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give tax or legal advice. Securities and investment advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer, and Registered Investment Advisor. Cetera is under separate ownership from any other named entity. In addition, some Investment advisory services are offered through Fulcrum Wealth Advisors, LLC. Fulcrum Wealth Advisors, LLC is a registered investment advisor in the State of Washington. Branch Address: 10940 NE 33rd PL., #210 Bellevue, WA 98004 Branch Phone: 877-400-0260