Supreme Court upholds state’s new capital gains tax

March 24, 2023

The Washington State Supreme Court upheld the constitutionality of the state’s new capital gains tax, rejecting arguments from BIAW and others that the tax was essentially an income tax.

“The Court’s ruling is at odds with the legal opinion of every other state in the country and the federal government,” said BIAW General Counsel Jackson Maynard. “Washington state is the only place in the country where a capital gains tax is not considered an income tax. This is a radical departure. It creates an undesirable inconsistency that will cripple our state’s competitiveness and drive more businesses out of our state.”

New capital gains tax upheld 7-2

In a 7-2 ruling released on March 24, the court overturned a lower court ruling invalidating the tax as unconstitutional.

Douglas County Judge Brian Huber agreed with the challenge to the state’s new capital gains tax, ruling it was an income tax and, therefore unconstitutional in Washington.

The Supreme Court, however, rejected that ruling, asserting the new tax is instead an excise tax because it applies to the sale or exchange of property.

Maynard says there may be a chance the Supreme Court’s ruling could be appealed to the US Supreme Court.

Paying Washington’s capital gains tax

In the meantime, Washington’s capital gains tax officially went into effect on Jan. 1, 2022. Individuals must pay a 7 % tax on the sale or exchange of long-term capital assets. This includes stocks, bonds, business interests or other investments and tangible assets. According to the state Dept. of Revenue (DOR) Capital Gains Tax Overview, there are several deductions and exemptions, including an annual standard deduction of $250,000 per individual.

Individuals must make their first payments for tax year 2022 by April 18, 2023. DOR’s frequently asked questions page says the tax does not apply to the sale of real estate, nor does it apply to transactions through retirement savings accounts, including:

• 401Ks tax-sheltered annuities
• Deferred compensation plan
• IRA
• ROTH IRA
• Employee-defined contribution plan
• Employee-defined benefit plan
• Similar retirement savings accounts.

Visit the DOR “Do you owe capital gains tax” page to learn the tax applies to you.