Washington’s Capital Gains Tax: What Every High-Net-Worth Resident Needs to Know
If you’re a Washington resident with significant investments, you’ve likely heard about the state’s capital gains tax. What started as a controversial new levy in 2022 has now become a permanent fixture of Washington’s tax landscape, surviving both constitutional challenges and voter repeal efforts. Here’s what you need to know about how this tax works and why it matters for your financial planning.
The Basics: A Tax on Large Investment Gains
Washington’s capital gains tax is unique among state taxes. Unlike an income tax (which Washington doesn’t have), this is technically an “excise tax” on the sale or exchange of certain investments. Think of it as a transaction fee imposed when you sell stocks, bonds, or business interests that have increased significantly in value.
The current rate structure, effective since January 2025:
7% on capital gains up to $1 million (after deductions)
9.9% on capital gains exceeding $1 million
For perspective, if you sold $2 million worth of stock that you originally bought for $500,000, your $1.5 million gain would be subject to both federal taxes (up to 23.8%) and Washington state taxes (up to 9.9%), potentially creating a combined tax rate of over 33%.
A Brief History: From Controversy to Acceptance
The tax was born from necessity. Washington consistently ranked as having the most regressive tax system in the nation, where wealthy residents paid a much smaller percentage of their income in state taxes compared to middle and lower-income families.
Timeline of key events:
2021: Legislature passes the tax to fund education and childcare
2022: Tax takes effect at 7% flat rate; immediately challenged in court
2023: Washington Supreme Court upholds tax as constitutional “excise tax”
2024: Voters reject repeal initiative by 63% to 37%
2025: New tiered rate structure increases top rate to 9.9%
The political and legal battles are now over. The tax has proven to be both constitutionally sound and politically popular, generating over $1.2 billion in its first three years to fund education programs.
What’s Covered (And What’s Not)
What does the tax apply to? The tax applies to several types of assets, including stocks and bonds, business patnership interests, cryptocurrency and other digital assets, as well as valuable collectible and artwork.
What are the major exemptions? Certain assets are exempt from this tax. These include real estate such as your home, rental properties, or land; retirement accounts like 401(k)s, IRAs, etc.; small family business accounts that meet specific revenue limits; and timber or agricultural property.
The Annual “Free Pass”
Here’s where things get interesting for planning purposes: Washington provides an annual exemption of approximately $270,000-$280,000 (adjusted yearly for inflation). This means you can realize this amount in capital gains each year without paying any Washington state tax.
Example: Sarah owns $1 million in Microsoft stock she received through her employment, with a cost basis near zero. Instead of selling it all at once and facing nearly $70,000 in Washington state taxes, she could sell approximately $275,000 worth each year for about four years, paying zero state tax through strategic use of the annual exemption.
Why This Matters for Your Financial Planning
If you’re sitting on significant appreciated investments—whether from employment stock options, a successful business, or long-term investments—this tax represents a substantial planning opportunity. The difference between paying and not paying can easily reach hundreds of thousands of dollars for high-net-worth individuals.
Consider these scenarios:
Tech Employee: You have $5 million in company stock from equity compensation with minimal cost basis. Without planning, a complete sale could generate over $400,000 in Washington state taxes alone. With proper strategy, this could be reduced to zero.
Business Owner: You’re planning to sell your business for $10 million, with a $2 million cost basis. The $8 million gain could result in $663,000 in Washington taxes. Strategic planning might eliminate most or all of this burden.
Retiree: Your investment portfolio has grown to $3 million over decades, with a $500,000 basis. As you begin spending down assets in retirement, thoughtful planning could save tens of thousands annually.
The Bottom Line: Planning Pays
Washington’s capital gains tax is now a permanent part of the landscape for wealthy residents. While the rates are significant, they’re far from confiscatory, and numerous legal strategies exist to minimize or eliminate the burden entirely.
The key is advance planning. Unlike some tax strategies that can be implemented retroactively, capital gains planning must generally be done before you sell your assets. Once the sale occurs, the tax is due, and there’s typically no way to unwind the transaction.
If you have significant appreciated assets and haven’t reviewed your situation in light of Washington’s capital gains tax, now is the time to act. The combination of federal and state taxes on large gains can easily exceed 30%, making professional planning advice one of the highest-return investments you can make.