7% WA Capital Gains Tax Upheld: Three Tax Planning Strategies to Consider
The 7% Washington capital gains tax applies to the sale or exchange of individual long-term capital assets (e.g., stocks, bonds, business interests) exceeding $250,000. Only the gains above this threshold are taxed, and some assets are exempt. Some of the exempt assets include real estate, interests in privately-held entities related to real estate, assets held in certain retirement accounts, and some other less commonly owned assets.
Some deductions and tax credits may help mitigate the impact of the new capital gains tax and provide some taxpayers relief. The deductions include the previously mentioned standard $250,000 deduction per individual, couple, or domestic partnership, adjusted for inflation annually; the long-term capital gain from selling a qualified family-owned small business; and charitable donations exceeding $250,000, with a maximum deduction of $100,000 per individual, adjusted for inflation. There is a business and occupation (B&O) tax credit for taxes due on the same sale or exchange subject to the capital gains tax, and some credits for taxes paid in other jurisdictions.
The primary argument against the tax is that capital gains are income, which is considered property. The state's constitution limits property tax to one percent, so opponents argue that the 7% capital gains tax is unconstitutional. However, in a 7-2 ruling, the Washington Supreme Court deemed the tax to be a legal excise tax, not a property tax, since it is imposed on the sale or exchange of capital assets rather than the assets or gains themselves.
Currently, 41 states and the District of Columbia, as well as the federal government, tax capital gains and classify them as income taxes. Despite the 7% capital gains tax, Washington state does not have a state personal income tax. The revenue generated from the tax will be used to support public education in Washington state.
Here are three potential strategies for individuals to explore with your financial or tax advisor:
Taxpayers can plan to spread these gains over multiple tax years. This strategy can help individuals stay below the $250,000 long-term capital gains threshold, thus reducing their exposure to the 7% capital gains tax in Washington state.
2. Tax-Loss Harvesting
Tax-loss harvesting is a strategy that involves selling investments that have capital losses to offset the capital gains realized on other investments. It's essential to be aware of the "wash-sale" rule, which prohibits the repurchase of a substantially identical security within 30 days of the sale.
3. Donating Appreciated Assets
For individuals that are charitably inclined, donating appreciated assets, such as stocks or real estate, directly to charities or donor-advised funds would be a strategy you could take. By donating the appreciated assets directly, individuals can avoid realizing capital gains on the sale of those assets, thus eliminating the associated tax liability. Additionally, they may be eligible for a tax deduction based on the fair market value of the donated assets, further reducing their taxable income.
As with all financial planning and tax questions, the answer is always “It depends.” I’d highly recommend that you discuss this new tax and its impact on your financial situation with your qualified financial and tax advisors.