WashingtonSB 53142025-2026 Regular SessionSenateWALLET

Modifying the capital gains tax.

Sponsored By: Derek Stanford (Democratic)

Became Law

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Bill Overview

Analyzed Economic Effects

14 provisions identified: 6 benefits, 2 costs, 6 mixed.

Big gifts reduce capital gains tax

You can deduct charitable gifts above $250,000 to Washington‑directed qualified nonprofits. The deduction is capped at $100,000 per year. Both the $250,000 minimum and the $100,000 cap adjust each year. You cannot carry the deduction to other years.

Credit when B&O and capital gains overlap

The law prevents double state taxes on the same sale. Through December 31, 2025, you can claim a B&O tax credit equal to the B&O tax on a sale that is also taxed under the capital gains law. Starting with tax year 2025 (taxes due in 2026), you can claim a capital gains tax credit equal to the B&O tax paid on that same sale. Each credit is nonrefundable, applies only up to the tax due for that period, and cannot be carried to other years.

Tax break for selling family business

You can deduct the adjusted capital gain when you sell substantially all of a qualified family‑owned small business. You must have held the interest at least 5 years. You or your family must have materially taken part for 5 of the last 10 years, unless you sell to a qualified heir. The business needs $10,000,000 or less in worldwide revenue in the prior 12 months. The deduction equals the adjusted capital gain from the sale.

Higher penalties for tax problems

A 35% penalty applies if extra tax is from a disregarded transaction, unless you disclosed it before the department found it. A 50% penalty applies if the extra tax is from evasion. If you underpaid estimated tax by enough (paid under 80% and short by at least $1,000), a 5% penalty can apply. The department cannot stack some penalties together.

Other‑state tax credit and allocation rules

Beginning January 1, 2026, gains from tangible property are allocated to Washington if the property was in Washington at the sale or at any time during the tax year or the prior year. Gains from intangible property are allocated to Washington if you were domiciled in Washington at the time of sale. You can claim a nonrefundable credit for taxes you legally paid to another U.S. state on the same gains. The credit equals the smaller of Washington tax on those assets or the tax paid to the other state. No carryforward or carryback.

Expanded capital gains tax exemptions

The law expands and clarifies what is exempt from Washington’s capital gains tax. Exemptions include recorded real estate transfers and some interests in private entities tied to directly owned real estate. Retirement accounts, property taken for public use, some farm and ranch sales (like breeding livestock), business property you can depreciate or expense, timber and timberland, certain commercial fishing rights, and goodwill from licensed auto dealerships can also be exempt. The law explains how to value and document these exemptions.

School funds backfilled when credits cut tax

When the new credit lowers capital gains revenue, the state treasurer transfers money from the general fund to education accounts. Transfers go to the Education Legacy Trust Account and the Common School Construction Fund by the last working day of March, June, September, and December. The revenue department gives notice two weeks before each transfer and can fix past over‑ or under‑payments. Challenges must be filed within 15 days and go to Thurston County court.

Joint filing and shared liability rules

If you file a joint federal return, you must file a joint Washington capital gains return. If you filed separate federal returns, you generally file separate Washington returns, but registered domestic partners may file a joint state return. Spouses and partners are usually both responsible for the tax unless relief applies. Thresholds and caps are combined for spouses. If you file separately and cannot agree on a split, each is limited to half. These rules take effect January 1, 2026.

Definitions change how gains are counted

Starting January 1, 2026, the law updates key capital gains terms. It expands what counts as adjusted capital gain, including some loss carryovers and certain futures and options contracts. It clarifies other defined terms used to compute Washington capital gains.

Law void without budget funding

If the omnibus budget does not include specific funding for this act by June 30, 2025, the entire act is null and void. The law’s changes depend on that funding being provided.

Brokers must send 1099-B to state

Starting January 1, 2026, brokers and barter exchanges that pay for sales of long‑term assets must e‑file 1099‑B copies with the Department of Revenue within 90 days after filing with the IRS. A $50 penalty applies for each missed or willfully false filing. The law presumes gains are taxable in Washington when signs like a Washington address, domicile, or account opened in Washington are present, unless you prove otherwise.

Past B&O credit rights protected

When the B&O overlap credit expires on January 1, 2026, past rights and duties stay in place. You can still claim credits you earned from sales before the expiration and seek relief allowed by law. Orders and proceedings under the old rule continue.

Capital gains filing and payment rules

If you owe Washington capital gains tax, you must file by the federal due date and usually file electronically. You must attach your federal return and all related forms like 1099‑B and K‑1. Pay the tax by the filing date using electronic transfer. If your federal return later changes and affects Washington gains, amend the Washington return within 90 days. Penalties apply for late or missing filings, with limited waivers.

Annual inflation updates to thresholds

Beginning October 2025, the department updates certain dollar amounts each October using the Seattle‑area CPI. Amounts are rounded to the nearest $1,000 and published by October 31. New amounts apply the next calendar year. If the CPI would lower an amount, the law keeps the old amount. Indexed items include the standard deduction, the $10,000,000 small‑business revenue test, and the $250,000 minimum and $100,000 cap for the charitable deduction.

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Sponsors & Cosponsors

Sponsor

Derek Stanford
Democratic • Senate

Cosponsors

Paul Harris
Republican • Senate
T'wina Nobles
Democratic • Senate

Roll Call Votes

All Roll Calls

Yes: 119 • No: 75

Senate vote • 4/18/2025

Final Passage as Amended by the House

Yes: 30 • No: 19

House vote • 4/11/2025

Final Passage as Amended by the House

Yes: 59 • No: 37 • Other: 2

Senate vote • 3/3/2025

3rd Reading & Final Passage