Authored by: Lauren Fricke
In 2021, the Washington State legislature enacted a new tax on the sale of long-term capital assets. In March 2022, the Douglas County Superior Court ruled the new tax is invalid because it violates the state constitution. That decision has been appealed to the Washington State Supreme Court, but while we await its decision, taxpayers have been uncertain about whether and when they may need to file and pay the tax. However, on November 30, 2022, the Washington State Supreme Court granted a stay on the lower court’s ruling. The effect of this stay is that the Department of Revenue can begin collecting the capital gains tax for capital gains generated since January 1, 2022.
The question is, what does this mean for you? Here are five things you should know.
- How much is the tax?
- 7% on the sale and exchange of all assets occurring on or after January 1, 2022, with gains exceeding a standard deduction of $250,000 in 2022.
- When do I need to file and pay the tax?
- Filings and payment to the Department of Revenue are due April 18, 2023.
- Are there any exclusions or deductions?
- Yes. There are several important exclusions and deductions such as the sale or exchange of real estate, assets held in retirement accounts, timber and timberland, certain agricultural products, and qualified family-owned small businesses. In order to qualify as a family-owned business, the business must be one in which the taxpayer held a qualifying interest for at least five years immediately preceding the sale; the taxpayer and/or members of the taxpayer’s family materially participated in operating the business for at least five of the ten years immediately preceding the sale or transfer; and the worldwide gross revenue is less than or equal to $10,000,000.
- Will the tax remain in effect?
- We do not know yet. While the stay on the lower court’s opinion allows the Department of Revenue to begin collecting the new tax, the case itself has not been decided. The Washington State Supreme Court heard oral argument on the issue on January 26, 2023. However, we may not get a final decision until after the filing deadline in April.
- What should I be doing now?
- Be proactive and do not wait for the decision. Consult a tax professional in order to begin preparing your filing for the April deadline. With the tax reinstated pending the decision, the Department of Revenue can collect the tax starting in April without waiting for a decision to be issued.
Resources:
Washington Supreme Court Order: https://www.courts.wa.gov/content/publicUpload/Supreme%20Court%20Orders/1007698%20Public%20Order%20Motion%20113022.pdf
Link to the Washington State Statute: https://app.leg.wa.gov/RCW/default.aspx?cite=82.87
Department of Revenue Information page: https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax