Washington State Capital Gains Tax. In May 2021, a state-level capital gains tax was instituted, and then quickly challenged by taxpayers arguing the tax was unconstitutional under the U.S. Constitution’s commerce clause in how it applies to transactions that extend beyond the state’s borders. But thus far, all challenges to the tax have been denied. The legislature has taken the tax further, introducing a two-tiered tax structure that applies an additional 2.9% tax (on top of the original 7% tax) to net long-term capital gains exceeding $1 million (after a $270,000 exemption, adjusted annually for inflation). The new tax of up to a total of 9.9% will be retroactively applied to sales occurring on or after January 1, 2025.
The tax applies to individuals in Washington State on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments and tangible assets. The tax does not apply to the sale of real estate, assets held in certain retirement savings vehicles, and a few other exemptions.
Increasing the Washington State Estate Tax. This new Bill also makes significant changes to the Washington state estate tax, effective July 1, 2025.
First, the state estate tax exemption, which has remained at $2.193 Million since 2018 is now increased to $3 million, adjusted annually for inflation.
Second, state estate tax rates will be increased significantly for almost every bracket. The highest tax rate was previously 20% of an estate over $9 Million, and now that same estate will see a capped tax rate of 35%. Washington now has the highest state-level estate tax rate in the nation, with all other states capping their tax rate at 20% or less. Large estates that are subject to both federal and state-level estate tax will be subject to a combined effective tax rate of around 61%.
Finally, the legislation increases Washington’s qualified family-owned business interests’ deduction to $3 million. The legislation also establishes that a “qualified nonfamilial heir1” may take estate tax deductions relating to inherited farms and farming equipment.
The below table highlights the differences in tax rates, showing tax rates on the value of an estate exceeding the exemption:
