Washington's 7% Capital Gains Tax: Who Owes and Who Doesn't

Washington was a zero-income-tax state for decades. In 2021, the state legislature passed a 7% tax on long-term capital gains exceeding $250K (indexed; $270,000 for 2025). The tax survived legal challenge at the Washington Supreme Court in March 2023 and has been collected since tax year 2022.

For Seattle tech employees with RSU holdings and concentrated positions, this changed the calculus of living in Washington. The state still has no income tax on wages, but liquidity events can trigger meaningful tax.

A senior IC selling $1M of long-term appreciated RSU stock in a single year pays 7% on $730K ($1M minus $270K exclusion) = $51,100 in Washington capital gains tax.

What’s subject to the tax

The tax applies to long-term capital gains recognized by Washington residents. Specifically:

• Long-term capital gains on stocks, bonds, and most securities
• Long-term gains on the sale of intangible assets
• Long-term gains on certain business interests

Exempt:

• Real estate (residence and rental property)
• Retirement accounts (IRA, 401(k), Roth IRA distributions)
• Livestock
• Commercial fishing privileges
• Certain family-owned business interests
• Short-term capital gains (unchanged at zero state tax)

The $270K standard deduction

Each resident gets a $270,000 (2025) deduction before the 7% applies. Joint filers share a single $270,000 (not doubled).

This means:

• Sold $270K of stock with full basis → $0 tax
• Sold stock with $270K of gain → $0 tax
• Sold stock with $500K of gain → 7% on $230K = $16,100

The deduction is per taxpayer per year, not per transaction.

The charitable deduction

Donations to qualified charities reduce the net long-term capital gains subject to tax. Up to $104,000 (2025) of charitable donations can reduce the capital gains base.

For a resident donating $100K of appreciated stock to a DAF, the federal deduction applies at fair market value under IRC §170 (30% AGI limit for appreciated stock), and the Washington capital gains tax is reduced by the $100K donation amount.

This is a Washington-specific deduction for donations of long-term capital gain assets to tax-exempt charities.

Trusts and residency rules

A trust can be subject to Washington capital gains tax if:

• The trust was created in Washington
• The trustee is a Washington resident
• The trust is administered in Washington

For high-net-worth Washington residents considering trust structures to hold concentrated stock, trust residency matters. Out-of-state trusts (with non-WA trustees) generally avoid WA capital gains tax on trust-level gains, subject to the standard rules under Washington Department of Revenue guidance.

Relocation and trailing nexus

Unlike California, Washington does not apply trailing nexus to capital gains. The tax applies only to residents at time of gain recognition.

Moving from Washington to Nevada before a large sale avoids the tax entirely. Moving into Washington triggers the tax on post-move gains only.

Relocation timing:

• Move out before the sale: no WA tax
• Move out before year-end but after the sale: WA tax applies to the sale (recognized while resident)
• Move in during the year, sell later in same year: WA tax may apply on post-move gains

Washington residency generally requires:

• Physical presence (domicile)
• Intent to remain
• Not being a resident elsewhere

Corporate stock transactions specifically

For RSU vesting, the ordinary income portion (W-2 income at vest) is not subject to Washington’s capital gains tax (Washington has no income tax on wages). Only the gain from vest price to sale price, if held long-term after vest, is taxed.

Example: RSU vests at $200 per share (ordinary income, no WA tax). Held 13 months. Sold at $300 per share. Long-term capital gain: $100 per share. This gain is Washington-taxable at 7% above the $270K threshold.

For most Seattle tech employees who sell at vest or shortly after (short-term), no Washington capital gains tax applies.

QSBS interaction

Qualified Small Business Stock under IRC §1202 is a federal exclusion (up to $10M or 10x basis). Washington does not explicitly exempt QSBS for its capital gains tax. Practitioner guidance has evolved, with some arguing QSBS gains should be excluded from Washington’s tax but others noting the state has not formally adopted the federal §1202 exclusion.

For founders and early employees expecting large QSBS gains, check current Washington Department of Revenue guidance. The treatment may continue to evolve.

Audit and enforcement

Washington’s Department of Revenue administers the capital gains tax. The first returns were filed for tax year 2022 (due April 2023). Enforcement has ramped up in 2024-2025:

• Data matching against federal 1099-B reports
• Residency audits for high-dollar moves
• Scrutiny of trust structures

Washington’s assessment period is 4 years from filing, similar to federal §6501.

Planning strategies

For Seattle tech employees with concentrated positions:

Charitable deductions. Up to $104K/year in donated long-term appreciated stock reduces both federal AGI and Washington capital gains tax base.

Spread sales across years. Keep each year’s gain under the $270K threshold to pay zero. For a $2M embedded gain, spread over 8 years.

Relocate before major liquidation. Moving to Nevada, Oregon (4.95% rate but lower than most), or another state changes the tax profile. Must be genuine move.

Use exchange funds. §721 exchange fund contributions defer federal tax. The contribution itself doesn’t trigger gain, so no Washington tax at contribution. Post-7-year distribution is still a taxable event.

Tax-loss harvesting. Realize losses in the same year as gains to offset. Direct-indexed portfolios generate ongoing loss opportunities.

Comparison to other states

Washington’s 7% on capital gains compares to:

• California: 13.3% top state rate on ordinary income and capital gains
• New York + NYC: 10.9% + 3.876% = 14.78% on high-dollar gains
• Oregon: 9.9% top rate on all income
• Massachusetts: 5% base + 4% surcharge above $1.083M = 9%
• Nevada, Texas, Florida, Wyoming: 0%

Washington is middle-of-pack, and it only applies to long-term gains above the exclusion. For wage-heavy earners with limited capital gains activity, Washington is still attractive. For concentrated-position sellers, the math matters.

Frequently asked

What about my home sale? Real estate gains are exempt. Primary residence gains up to the federal §121 exclusion ($500K married / $250K single) are federally and Washington-exempt.

Does the tax apply to dividends and interest? No. Those are ordinary-income items, which Washington doesn’t tax.

What if I use an SBLOC against stock instead of selling? No gain, no tax. SBLOC borrow doesn’t trigger Washington capital gains tax. You can borrow indefinitely and defer the tax.

Does §6501 statute apply? Federal §6501 applies to IRS audits. Washington has its own 4-year assessment period for state returns.

What about concentrated stock held in a 401(k)? NUA distribution under IRC §402(e)(4) at retirement creates a basis income event (ordinary income, no WA tax at federal level) and future capital gain treatment on the NUA appreciation. The capital gain on sale could be Washington-taxable if held as resident.