Supreme Court Grants Temporary Approval to Continue Collecting Washington Capital Gains Tax
December 8, 2022
New legislation passed in Washington in 2021 creating a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investment and tangible assets. However, on March 1, 2022 a Douglas County Superior Court judge ruled the new tax to be unconstitutional.
The case has been appealed to the Supreme Court, who has granted the Washington Department of Revenue permission to collect the capital gains tax until there is a final ruling on the case. If the Supreme Court upholds the capital gains tax, Washington will no longer be a no-personal-income-tax state. If the Supreme Court finds the tax to be unconstitutional, any tax payments received will be refunded with interest.
The new tax, if upheld, is effective beginning January 1, 2022 and only applies to individuals. There are several deductions and exemptions available that may reduce the taxable amount, including an annual standard deduction of $250,000 per individual (it appears that married couples filing jointly may only get one deduction). The tax is categorized as an excise tax making it not deductible for federal purposes. This is different from other states with a capital gains tax, who acknowledge it as income tax.
New Washington Capital Gains Tax Return
Individuals owing capital gains tax in Washington would be required to file a capital gains tax return, along with a copy of their federal tax return. The new capital gains tax return is due the same time as the individual’s federal return. Individuals who receive a federal extension are also permitted the same filing extension for their capital gains tax return. Note that filing an extension does not extend the due date for paying the capital gains tax.
Payment of the tax must be made electronically unless the Washington Department of Revenue grants a waiver.
If the new Washington capital gains tax return is filed late, penalties will apply at a rate of 5% per month, up to a maximum of 25% of the tax due. Additional penalties and interest will also apply to late payments of the tax, including a 29% underpayment penalty and an assessment penalty of an additional 5% if the Washington Department of Revenue assesses additional tax and the underreporting was 20% or more of the tax due..
The sale or exchange of the following assets are exempt from the Washington capital gains tax:
- Real Estate.
- Interests in privately held entities to the extend that the capital gain or loss from a sale or exchange is directly attributable to the real estate owned directly by the 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 IRC 167(a)(1) or qualifying expensing under IRC 179.
- 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.
In computing the Washington capital gains tax for a taxable year, a taxpayer can take the following deductions under RCW 82.87.060:
- a standard deduction limited to $250,000 per individual (it appears that married couples filing jointly may only get one deduction).
- Amounts that the state is prohibited from taxing under the Constitution of this state or the Constitution or laws of the United States.
- The amount of adjusted capital gain derived from the sale or transfer of the taxpayer’s interest in a qualified family-owned small business pursuant to RCW 82.87.070
- Charitable donations deductible under RCW 82.87.080
The following tax credits are available:
- A business and occupation (B&O) tax credit for B&O taxes due on the same sale or exchange which is subject to the Washington capital gains tax.
- A Washington capital gains tax credit for the amount of any legally imposed income or excise tax paid by the individual to another taxing jurisdiction on capital gains derived from capital assets within the other taxing jurisdiction to the extend such capital gains are included in the individual’s Washington capital gains.
Gatto, Pope & Walwick, LLP
Certified Public Accountants