Washington Governor Jay Inslee on May 4 signed into law a new tax on capital gains. The tax will go into effect on Jan. 1, 2022. However due to the nature of this tax, court challenges have been filed, so enforcement may be enjoined by the courts. We will keep you updated as events develop.
Generally, the tax applies to Washington sourced long-term capital gains received by individuals, such as long-term investment gains. The tax rate is 7%, but there are several exemptions and deductions highlighted later in this blast. Filing and payment due dates will correspond with the individual’s federal income tax returns.
Many of the details of how the bill will work are yet to be determined and will be part of the rule-making process. As the Washington Department of Revenue has never implemented a long-term capital gains tax, there will be a steep learning curve as it applies federal tax concepts to Washington taxes. There are a couple of major areas where we expect additional guidance is necessary.
Capital Gains Sourcing
The first is how capital gains will be sourced. The bill contains language that gains from intangibles are sourced to the individual’s domicile. In other words, this would be the state the individual considers to be his/her home. Sales of tangible property are usually sourced to the asset location at the time of sale, but may be sourced to Washington if present in the state in the year of sale or prior year and owned by a Washington resident.
Secondly, the bill also contains credit provisions in cases where multiple states tax the same transaction and in cases where both the capital gains tax and the Business and Occupation tax apply to the same transaction. Additional details on these credits will be needed to understand which state has priority to tax and how the credits will work in practice.
Below are the exemptions and deductions as laid out in the bill, individuals who believe they may qualify should consult the bill language or consult their tax advisor.
- Real estate where title is directly transferred, and the gain from the sale of directly held private entities holding real property, to the extent of the gain relating to the real property
- Retirement account gains
- Certain qualifying livestock for active farmers; timber, commercial fishing rights
- Most depreciable assets
Standard deduction of $250,000 (indexed to inflation) which applies to both single and married filers (the same deduction applies regardless of federal filing status).
Qualified family owned small businesses – applies to businesses with worldwide revenues of $10 million or less (indexed to inflation) in the prior year and which satisfy certain ownership holding and material participation requirements. Generally, most single-family businesses should meet the ownership requirements, but there may be situations where businesses owned by two or more families may also qualify.
Charitable donations to Washington charities up to a maximum additional deduction of $100,000 (i.e. donations of $350,000 or more are needed to get the full deduction since the standard deduction would cover the first $250,000)
While the law calls this a capital gains excise tax, many critics consider it to be an income tax. Income taxes are currently unconstitutional in Washington based on decades old case law. So, the courts have been asked to consider whether this is an income tax and if so, whether the prior ruling deeming them unconstitutional should be overturned. Many believe this is the real reason behind the passage of this bill – to get the Washington Supreme Court to rule on the constitutionality of an income tax in Washington.
We’ll keep you updated as more information becomes available. For more information, please contact us.
Published on May 25, 2021