Washington Tax on Capital Gains

Washington State does not have a general personal income tax, but it does impose a capital gains excise tax on the sale of certain long-term capital assets.

This tax applies only when gains exceed an annual standard deduction and is effective retroactively to January 1, 2025, with taxes due in April 2026 & 2027.

Key Details for Tax Year

Standard Deduction

• $278,000 of long-term capital gains is exempt from the tax
• Applies to all filers, including:
  • Single filers
  • Married couples filing jointly
• The deduction is adjusted annually for inflation

Only gains above this threshold are subject to tax.

Capital Gains Tax Rates

Washington uses a two-tier rate structure based on the amount of taxable gain:

• 7% on taxable gains up to $1 million
  • This applies to total gains from $278,001 up to $1,278,000
• 9.9% on the portion of taxable gains over $1 million
  • This applies to total gains above $1,278,000

The higher rate applies only to the excess amount, not the entire gain.

Who the Tax Applies To

• Individuals domiciled in Washington State
• Gains must be allocated to Washington
• Applies only to long-term capital assets (held more than one year), such as:
  • Stocks and mutual funds
  • Bonds
  • Business ownership interests

This is an excise tax on the transaction, not a general income tax.

Major Exemptions

The Washington capital gains tax does not apply to gains from:

• Real estate, including:
  • Primary residences
  • Rental or investment property
• Retirement accounts, such as:
  • 401(k)s
  • IRAs
  • Pensions
• Qualified family-owned small businesses, if specific requirements are met
• Certain agricultural and natural resource assets, including:
  • Livestock
  • Timber and timberland

These exemptions significantly limit the tax’s scope.

Losses and Deductions

Capital Losses

• Capital losses cannot be carried forward
• Losses may only offset gains in the same tax year
• Any unused losses are lost for Washington tax purposes

This differs from federal rules, which allow multi-year loss carryovers.

Charitable Contributions

• Taxpayers may deduct qualifying charitable donations
• Up to $111,000 (for 2025) may be subtracted from total capital gains
• Donations must meet Washington eligibility rules

This deduction can substantially reduce or eliminate taxable gains.

Interaction with Federal Taxes

The Washington capital gains tax is separate from federal taxes.

You may still owe:

• Federal long-term capital gains tax (0%, 15%, or 20%)
• 3.8% Net Investment Income Tax (NIIT), if applicable

Washington does not provide a credit for federal capital gains taxes paid.

Example

• A Washington resident sells stock and realizes $500,000 in long-term capital gains
• The first $278,000 is exempt
• Remaining $222,000 is taxed at 7%
• Washington tax owed: $15,540
• Federal capital gains tax may still apply separately

Why Electronic Filing Is Strongly Recommended

Because the Washington capital gains tax requires:

• Federal-to-state reconciliation
• Asset classification and exemption analysis
• Charitable deduction calculations
• Precise gain allocation

👉 Electronic filing is the most accurate and efficient option, reducing errors and ensuring compliance.

Bottom Line

Washington’s capital gains excise tax applies only to high levels of long-term investment gains, with a generous $278,000 exemption, targeted rates of 7% and 9.9%, and broad exemptions for real estate and retirement assets.

Since the tax operates separately from federal law and has unique rules for losses and deductions, careful calculation and electronic filing are essential to avoid costly mistakes.