Understanding the Washington State Capital Gains Tax
Authored by: Jim Miracle, Senior Accountant at Cordell, Neher & Company, PLLC
Starting January 1, 2022, Washington state implemented a new capital gains tax that affects individuals. Under this tax, individuals are subject to a 7% tax on their adjusted long-term capital gains that are allocated to Washington.
It's important to note that this tax only applies to individuals and not to entities such as corporations or pass-throughs. However, individuals will be treated as "beneficial owners" of long-term capital assets held by pass-throughs based on their ownership in the entity and gains on sale of these assets may be subject to the tax.
The tax specifically targets long-term capital gains allocated to Washington state. The rules for allocating gains from the sale of tangible personal property (such as planes, artwork, cars, and boats) differ from the rules for allocating capital gains from the sale of intangible personal property (such as stock and intellectual property).
By clarifying the rules and adjustments for Washington capital gains, individuals can better understand their tax obligations and ensure compliance
Filing Date: The Washington State Capital Gains Tax is due at the same time as your federal income tax return, typically on April 15th each year.
Exemptions: While this tax applies to individual "natural persons," several exemptions exist that may exclude you from the tax requirement. Exempt categories include:
- Capital gains under $250,000.
- Real estate transactions.
- Family-owned businesses.
- Depreciable property used in a trade or business.
- Investments held in retirement accounts.
- Capital gains from cattle, horses, or breeding livestock.
- Timber and timberland transactions.
- Commercial fishing privileges.
- Goodwill resulting from the sale of an automobile dealership.
Filing Requirements and Process: If you don't qualify for these exemptions, you'll need to file your capital gains information with the Washington State Department of Revenue (DOR). Here's what you need to do:
Online Filing: Filing must be done online using your Secure Access Washington account, which can be accessed at www.secureaccess.wa.gov.
Federal Tax Return: You must submit a copy of your federal tax return along with your Washington State Capital Gains Tax filing.
Electronic Payment: If you owe taxes, payment must be made electronically. Washington State does not accept paper checks for tax payments.
Extensions and Estimated Payments: Extensions may be requested for the Washington State Capital Gains Tax, similar to federal tax extensions. However, there's an important caveat to keep in mind:
- Extension to File vs. Payment:An extension to file the return is not an extension to pay the tax. You must make an estimated payment by the same date that your federal return is due before extension. This payment should cover at least 80% of your expected tax liability, failing to do so may result in penalties and interest on the balance due.
The Washington State Capital Gains Tax is an important consideration for individuals with substantial capital gains. While it may seem complex, understanding the exemptions, filing requirements, and payment deadlines can help you navigate this tax efficiently. If you have questions or need assistance, consulting a tax professional is always a wise decision to ensure compliance with the state's tax regulations.
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