WashingtonSB 53142025-2026 Regular SessionSenateWALLET

Modifying the capital gains tax.

Sponsored By: Derek Stanford (Democratic)

Signed by Governor

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Bill Overview

Analyzed Economic Effects

14 provisions identified: 7 benefits, 4 costs, 3 mixed.

Investors get credit for outside taxes

Investors can claim a Washington credit for legally imposed income or excise tax paid to another jurisdiction on gains there. Those gains must also be included in Washington capital gains. The credit equals the smaller of that outside tax or Washington capital gains tax from the same assets. Unused credit cannot be refunded or carried to another year.

More retirement assets avoid gains tax

Washington capital gains tax exempts asset sales or exchanges inside qualifying retirement savings vehicles, including foreign vehicles. The vehicle must penalize withdrawals until its legal or beneficial owner reaches a specified age.

Family business changes preserve tax eligibility

Changing only a family business's legal entity type or making a nonmaterial change does not restart its five-year holding period. This protects eligibility for the capital gains deduction when owners sell substantially all business assets. Other requirements include a $10 million worldwide revenue cap for the prior 12 months, adjusted for inflation. Sellers generally need material participation in five of the past ten years, unless selling to a qualified heir. Family ownership requirements still apply.

New tax offset for business sellers

Beginning with tax year 2025, with taxes due in 2026, sellers get a new Washington capital gains tax credit. It equals the business and occupation (B&O) tax imposed on the same sale or exchange. The credit cannot exceed capital gains tax otherwise due for the reporting period when the sale occurred. Unused credit cannot be refunded or moved to another period.

Large donors face Washington charity limits

The capital gains charitable deduction requires a charity directed and managed mainly within Washington. The charity must also qualify to receive deductible contributions under federal rules. Only qualifying donations above the $250,000 minimum count, with a maximum yearly deduction of $100,000. Both amounts are adjusted for inflation, and donations must be made in the same tax year. Unused deductions cannot move to another year.

Business tax credit ends in 2026

The business and occupation (B&O) tax credit for sales also subject to Washington capital gains tax expires January 1, 2026. Sales or exchanges before that date can still qualify for previously earned credits. New sales after expiration cannot earn this B&O credit.

Investors face amendment deadlines and interest

A final federal return change affecting Washington gains or tax requires a state amendment within 90 days. Missing that deadline costs 5% of additional tax per late month or partial month, capped at 25%. The department generally has four years after the filing year to assess more tax, penalties, or interest. For amounts tied to a federal change, that window runs four years after the amended return's filing year. Interest on assessed shortfalls runs from April 30 after the reporting year through the notice's due date, then continues until paid.

Investors face revised gains calculations

The law changes how Washington calculates adjusted capital gain. It revises treatment of long-term loss carryovers tied to exempt sales, sales before January 1, 2022, and sales outside Washington. It also addresses gains and losses from section 1256 investment contracts held longer than one year. Those contracts are treated as though the special federal section 1256 rule did not exist. These changes can raise or lower an affected investor's taxable gains.

Compliant investors get payment penalty relief

The department must waive or cancel a capital gains payment penalty when an eligible taxpayer requests relief. The taxpayer must have paid all required capital gains returns on time during the prior five calendar years. There must be no enforcement contact for the reporting period covered by the request. This waiver applies when the separate general statutory waiver does not apply.

Investor tax amounts rise with inflation

Starting each October in 2025, the department adjusts specified amounts using Seattle-area inflation data available October 1. The calculation compares the index with the prior 12-month period, rounds to the nearest $1,000, and never lowers amounts. Covered amounts include the standard deduction, family-business revenue cap, and charitable donation minimum and maximum. Most adjustments apply the next calendar year. The Education Legacy Trust Account distribution amount is also adjusted, applying the next fiscal year.

Education funds receive replacement tax money

The department must replace workforce education deposits lost to the business tax credit with equal General Fund transfers. That workforce backfill rule expires January 1, 2026. The treasurer must also replace capital gains revenue lost to the new credit in the two designated education funds. Transfers are due by the last working day of March, June, September, and December, excluding amounts already replaced. The money is distributed like collected capital gains taxes, shifting the funding burden to the General Fund.

Late investor filings face waiver limits

A filing-history waiver for late capital gains returns requires no late required returns during the prior five calendar years. The taxpayer must also have no department enforcement contact for the reporting period covered by the request. A separate waiver remains available for circumstances beyond the taxpayer's control.

Couples share gains tax filing limits

Spouses filing jointly federally must file a joint Washington capital gains return; separate federal filers generally file separately in Washington. Registered domestic partners can file jointly in Washington even with separate federal returns. Couples count as one individual for thresholds, caps, deductions, credits, and other amounts. Separate filers must allocate community or partnership assets and activity under department rules; without agreement, each is limited to one-half. Each partner generally owes the full unpaid tax, unless federal innocent-spouse relief or department rules provide relief.

Investor filing proof and extension rules

Taxpayers owing Washington capital gains tax must attach their federal return, related schedules and attachments, and received federal gain-related tax documents. The Department of Revenue can request more federal information and require added reporting or verification. A federal filing extension also extends the state filing deadline when satisfactory proof reaches the department by the state due date. Extra filing time does not delay payment. Returns must be filed electronically, with limited waivers.

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