Washington will be implementing a 7% tax on the sale or exchange of long-term capital assets beginning January 1, 2022.
Revenue from the tax will be used to fund the education legacy trust account and common school construction account.
The tax has been framed as an excise tax, rather than an income tax. As of August 2021, two lawsuits fighting the tax have been filed. We will continue to monitor this situation and will provide more information as it becomes available.
- The 7% tax will apply to long-term capital gains over $250,000 for both individuals and married couples
- The tax only applies to long-term capital gains; ordinary income, short-term gains, qualified dividends and tax-exempt interest are excluded
- Gains that are not reportable on Federal tax returns are also not reportable to Washington
- The tax will apply to tangible personal property sold in Washington, even if the owner is not a Washington resident
- If you pay capital gains tax to another jurisdiction (states or U.S. territories) on an asset sold in that other jurisdiction, a credit will be available on Washington taxes up to the amount of tax already paid. No carryforward will be allowed.
- Netting against long-term capital losses or loss carryforwards will not be allowed.
- A deduction of up to $100,000 per taxpayer is available for contributions of over $250,000 to Washington charities. This amount will be adjusted for inflation annually.
- A business & occupation tax credit will be included for B&O taxes due on the same sale or exchange for which Washington capital gains tax is due, in order to avoid double taxation
- Capital gains from corporations and other entities are exempt, unless the entity is a pass- through such as a partnership or LLC
- A long-term capital gain tax deduction will be available for the sale of a qualified family- owned small business
- The tax would apply to capital gains in a grantor trust, including intentionally defective non- grantor trusts, because the gains pass through to the grantor’s tax return.
- Non-grantor trusts would be exempt because the trust itself pays taxes, not the grantor
- Washington beneficiaries of non-grantor trusts who receive distributions of long-term capital gains would be subject to the tax
- Sales or exchanges of the following assets are exempt from this tax:
- Real Estate
- Interest in privately held entities to the extent any gains are directly attributable to real estate owned by that entity
- Retirement account assets
- Sales or exchanges of certain depreciable assets used in a trade or business
- Livestock related to farming or forestry
- Dividends, distributions, timber and timberlands from Real Estate Investment Trusts that are derived from the sale or exchange of timber/timberlands
- Commercial fishing privileges
- Goodwill received from the sale of a franchised auto dealership
Potential Action Items
- Realize larger capital gains in 2021 to avoid the Washington state tax on those sales
- Spread large gains over multiple years in order to keep the realized gains under the $250,000 threshold for the tax
- Utilize highly appreciated assets for charitable donations or gifts to lower-income beneficiaries
- This could include the use of Charitable Remainder Trusts in order to maintain an income stream from the assets, or the use of other non-grantor trusts
- For those considering a change of residency, consider doing so prior to selling assets with large capital gains
Nothing in this article is intended to provide, and you should not rely upon it for, accounting, legal, or tax advice or recommendations. We are not making any specific recommendations regarding any specific tax strategy, and you should not make any financial planning or tax decisions based on the information in this article. The intention of this article is educational, and it is intended only to discuss a few limited aspects of a very complex legislation. This article is not a comprehensive or complete summary of considerations regarding its subject matter. Each individual is in a different situation and has different items to address, and the options in this article are not appropriate for everyone. Please consult your Freestone client advisor and tax advisor regarding options specific to your needs.