In a 7-2 judgment, the Washington Supreme Court ruled on March 24th that the state's capital gains tax, passed by the state legislature in 2021, is constitutional. The measure imposes a 7% tax on the sale or exchange of long-term capital assets over $250,000 for Washington residents on certain transactions – such as stocks, bonds, and business interests – and the tax will be used to fund education and childcare initiatives within the state.
Taxpayers are allowed a $250,000 annual exemption, per household, with the 7% tax applied to the amount realized over the threshold. Real estate, retirement accounts and limited sales of small businesses are among other transactions exempt from the tax, which is expected to initially bring over $500 million a year in revenue to the state, $2.5 billion over a six-year period. Washington state is one of a limited number of states without an income tax and has long relied on property, sales, and business and occupation (B&O) tax collections to fund state-wide initiatives.
The law was challenged in 2021 by some who claimed it violates the state’s constitution, effectively representing an income tax which is unconstitutional in the state. The court, however, ruled that the capital gains tax is an excise tax rather than an income tax, and it is thus constitutionally sound. In this most recent ruling, Justice Debra L. Stevens wrote within the majority opinion, that the capital gains tax is not a property tax and therefore “it is not subject to the uniformity and levy requirements” of the Washington Constitution, dismissing challenges which have stated that the $250,000 exemption would violate those uniformity requirements.
The tax only applies to individuals, who may also be liable for their interests in pass-through entities with gains in Washington state and is effective as of January 1, 2022. That effective date means that initial capital gains tax payments for the 2022 year will be due on April 18, 2023, and an online extension of time to file a completed return is allowed but not an extension to pay. The state anticipates around 7,000 taxpayers will be subject to the tax in the first year.
It's important for taxpayers who may be subject to this new capital gains tax to understand their obligations and take necessary steps to comply. This includes accurately calculating and reporting their capital gains tax liability and making timely payments. Taxpayers should also keep records of their transactions and be aware of any exemptions or deductions for which they may be eligible. Failing to comply with the new tax requirements could result in penalties and interest charges.
For more details on how the tax works, exemptions, and deductions, please refer to our previous coverage.
Our team of tax professionals is here to help if you have any questions about these recent changes. Please contact our experts to discuss how this might affect your family or business.
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