On March 6, a bill to tax capital gains passed the Washington state senate. S.B. 5096, introduced on Jan. 6 by state senators Hunt Robinson and Wilson Nguyen, would impose an excise tax equal to seven percent of a Washington resident’s capital gains, starting January 1, 2022.
Only individuals are subject to the tax, and the bill exempts an individual’s first $250,000 of adjusted capital gains. “Adjusted capital gains” are federal net long-term capital gains with various specified modifications based primarily on Washington tax exemptions and allocation factors.
The first $350 million in revenue raised by this new tax each fiscal year are earmarked for the state’s education legacy trust account. The next $100 million collected annually would go toward the general fund, and the rest of the revenues would be placed in a “taxpayer fairness account” used “to offset existing tax burdens via policies such as the funding of the working families’ tax exemption.”
The bill, as amended, contains several carve-outs for this new tax, such as the sale of:
- Real estate.
- A controlling interest in an entity only to the extent that any long-term capital gain or loss from such sale or exchange is directly attributable to the entity’s interest in real property and the sale or exchange was subject to real estate tax.
- Certain retirement accounts and employee benefit plans.
- Assets under imminent threat of condemnation proceedings.
- Depreciable property under IRC Sec. 167(a)(1) or property that qualifies for expensing under IRC Sec. 179.
- Timber, timberland, or the receipt of capital gains as dividends and distributions from related real estate investment trusts.
- Goodwill from the sale of an auto dealership.
- The sale of a qualified family-owned small business.
The bill also includes a residency test for determining whether an individual qualifies as a statutory Washington resident, and apportionment provisions for capital gains. If passed by the House and signed by the Governor, the bill is expected to be the subject of a court challenge (as many see this as an income tax in violation of Washington case law) and/or referred to voters.