We've fielded many questions about the implications of Washington State's new long-term capital gains tax – which was ruled constitutional by the state supreme court on March 24, 2023.
In response, we've posted below a helpful FAQ put together by the WA State Department of Revenue that covers the most pressing questions in detail.
In broad terms, taxes are simply the cost of civilization. But managing tax effectively is an essential way to humanize wealth management so as to meet your own family's needs while also benefitting the common good.
If you have additional considerations about the impact of this tax in your particular case, please reach out and in concert with your tax people we’ll get answers and/or make a plan. As well, contact us if you need a referral to a qualified tax professional.
The Washington State Supreme Court has ruled that the excise tax on capital gains is constitutional and valid. As such, the Department of Revenue will continue collecting the tax which is due April 18, 2023.
General tax questions
1. Do I have to file a tax return if I don't owe capital gains tax?
No. You are not required to file a capital gains tax return if your net long-term capital gains are exempt or below the standard deduction of $250,000.
2. Do I owe capital gains tax when I sell real estate?
No. Washington’s capital gains tax does not apply to the sale or exchange of real estate. It does not matter:
- How long the seller owned the property.
- Whether the seller occupied the property.
- Where the property is located.
- What type of property it is (commercial or residential).
- Who owns the property (individual, trust, or business).
3. Do I owe capital gains tax on investments through my retirement savings account?
No. Washington’s capital gains tax does not apply to transactions through retirement savings accounts. This includes any transactions made through any of the following types of accounts:
- 401Ks Tax sheltered annuities.
- Deferred compensation plan.
- ROTH IRA.
- Employee defined contribution plan.
- Employee defined benefit plan.
- Similar retirement savings accounts.
4. What does allocated to Washington mean?
Allocation is a way of assigning the long-term capital gain or loss generated by a transaction to a particular jurisdiction.
Allocating long-term capital gains and losses is important because, for example, an individual’s long-term capital gains that are allocated to a location other than Washington are not subject to the Washington capital gains tax.
Long-term capital gains are allocated to Washington as follows:
- For intangible personal property such as stock or bonds, gains are allocated to Washington if the individual is domiciled in Washington at the time the sale or exchange occurred.
- For tangible personal property such as art or collectibles, gains are allocated to Washington if either of the following are true:
- The property was located in Washington at the time of sale.
- The property was not located in Washington at the time of sale but all of the following are true:
- The property was located in Washington in the same year or the year before the sale took place.
- The individual was a Washington resident at the time of the sale.
- The sale was not subject to an income or excise tax by another jurisdiction.
5. How are exemptions to the capital gains tax applied?
Exemptions from Washington’s capital gains are based on transactions. This means you may owe capital gains tax on some transactions and not on others.
6. Does my business entity owe capital gains tax?
No. Washington’s capital gains tax only applies to individuals. However, individual owners of entities that are pass-through or disregarded entities for federal tax purposes may owe Washington’s capital gains tax on gains from sales or exchanges made by such entities.
7. When do I report the long-term capital gain from my installment sale?
If you report payments for a sale on the installment method for federal tax purposes, you will report the long-term gain the same way for Washington’s capital gains tax. This means as you receive the installment payments.
Note: If the original sale took place before the effective date of Jan. 1, 2022, you do not owe Washington’s capital gains tax on any of the payments you receive.
8. Do I owe capital gains tax on a sale of cryptocurrency?
You will generally owe Washington’s capital gains tax on a sale of cryptocurrency if you hold it for more than one year and you are domiciled in Washington at the time the sale or exchange occurs. Cryptocurrency is considered intangible property for purposes of the capital gains tax.
9. Do I owe capital gains tax on mutual fund distributions?
Many mutual fund distributions are distributions of interest or dividends, which are not subject to Washington’s capital gains tax.
However, if you receive capital gain distributions because the fund manager sold intangible assets that were held for more than one year, you may owe Washington’s capital gains tax. The same is true of capital gain that is retained in the fund and not distributed to you (these amounts are reported on box 1a of form 2439). Capital gain from your mutual fund is reported on Schedule D of your federal tax return and should be included in your Washington capital gains calculation.
10. Can I use short-term losses to offset my long-term capital gains?
No. Short-term losses are not included in the calculation of federal net long-term capital gain and cannot be used to offset long-term capital gain subject to Washington’s capital gains tax.
11. Is day-trading subject to Washington’s capital gains tax?
Washington’s capital gains tax only applies to the sale or exchange of assets that are held for more than one year. You do not owe capital gains tax on the sale or exchange of assets you held for a shorter period.
12. Can a loss carryforward from before 2022 be used to reduce my capital gains tax?
No, losses from a sale or exchange that occurred before the effective date of January 1, 2022, cannot be used to reduce your capital gains tax. You must add back such losses using the Loss carryforward not allocated to Washington line of the tax return.
Return and payment questions
13. How do I complete the return if my K-1 doesn’t show basis or cost information?
You will enter the total amount of long-term gains in the Proceeds (sale price) field and leave the Cost or other basis field blank.
14. Do I have to enter a separate line item for each transaction?
No. You may choose to group transactions by type. For example, you may enter a single line item with the description “stock sales.”
15. Can my client submit a payment if I file their return for them?
Yes. The taxpayer can use their own SAW login to submit a payment through My DOR, or they can initiate a transfer to the department from their bank. Please see our Electronic Payments guide (PDF) for available payment options.
16. Can I pay by check?
Payments must be made electronically unless the department has granted an exemption from this requirement. You may incur additional penalties if you do not submit payment electronically.
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Photo of Mt. Rainier by flickr user @paweesit