Washington Supreme Court Upholds Capital Gains Tax

Effective January 1, 2022, Washington law imposes a 7% tax on gains over $250,000 per year from the sale or exchange of long-term capital assets allocated to Washington such as stocks, bonds, business interests, or other investments and tangible assets. Among the exemptions from the tax are gains from the sale of real estate and retirement accounts.

In March 2022, the Douglas County Superior Court ruled in Quinn v. State of Washington that the capital gains tax violates the uniformity and limitation requirements of the state constitution because it is a tax on the receipt of income and therefore a tax on property pursuant to decades of caselaw.

The State appealed the ruling to the Washington Supreme Court, and in an Opinion dated March 24, 2023, the Court upheld the tax and concluded that “the capital gains tax is appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.” Thus, because the tax is an excise tax and not a property tax, it is not subject to the uniformity and limitation requirements of the state constitution. The Court further held that the tax is consistent with the privileges and immunities clause of the state constitution and the dormant commerce clause of the federal constitution.

Individuals owing capital gains tax are required to file a Washington capital gains tax return, along with a copy of their federal tax return for the same taxable year, with the Washington Department of Revenue. The capital gains tax return is due at the same time as the individual’s federal income tax return is due, which for the 2022 calendar year is April 18, 2023, unless extend. As under federal income tax law, an extension of the return filing deadline does not extend the payment due date.