Navigating Washington's New Capital Gains Tax Landscape

Posted May 27, 2025, By Cole Ferrier

The 2025 Washington State legislative session brought significant adjustments to the state's tax code, with notable changes to the capital gains tax that will impact investors and high-net-worth individuals. Signed into law in May 2025, these modifications, primarily driven by Senate Bill 5813 and Senate Bill 5314, aim to create a more progressive tax structure and increase funding for state priorities like education. Understanding these changes is crucial for effective financial planning.

What's New with the Washington State Capital Gains Tax in 2025?

Washington's capital gains tax, first implemented in 2022, has undergone a key structural change effective retroactively to January 1, 2025. Here’s a breakdown of the updated law:

1. New Tiered Rate Structure:

   • The existing 7% tax rate continues to apply to net long-term capital gains that exceed the standard annual exemption, up to $1 million above that exemption.

   • A new, additional 2.9% tax has been introduced for net long-term capital gains that exceed $1 million above the standard annual exemption. This effectively creates a top tax rate of 9.9% for the highest tier of capital gains.

2. Standard Exemption:

   • The law retains a standard annual exemption for capital gains. For the 2024 tax year, this exemption was $270,000 per individual (and is adjusted annually for inflation). The specific inflation-adjusted amount for 2025 will be confirmed by the Washington State Department of Revenue. It's important to note that this exemption applies before the $1 million threshold for the higher tax rate is considered.

   • Example (using the 2024 exemption for illustration):

     • If your net long-term capital gains are $500,000:

       • $270,000 is exempt.

       • $230,000 ($500,000 - $270,000) is taxed at 7%.

     • If your net long-term capital gains are $1,500,000:

       • $270,000 is exempt.

       • $1,000,000 (the next portion up to $1,270,000 in gains) is taxed at 7%.

       • $230,000 ($1,500,000 - $1,270,000) is taxed at 9.9%.

3. Retroactive Effective Date:

   • Crucially, the new 9.9% tax rate for gains exceeding $1 million (above the exemption) is effective retroactively to January 1, 2025. This means transactions that have already occurred in 2025 could be subject to this higher rate.

4. Continued Exemptions:

   • The law continues to exempt several types of assets from the capital gains tax, including but not limited to real estate and assets held in certain retirement accounts.

5. Charitable Deductions:

   • The law maintains provisions for certain charitable contribution deductions against the capital gains tax.

Implications for Financial Planning

These changes to Washington's capital gains tax have significant implications for financial planning, particularly for individuals with substantial investment portfolios. Proactive planning is more critical than ever.

• Increased Tax Liability for High Earners/Large Gains: The most direct impact is a higher potential tax bill for those realizing significant capital gains. The jump from a flat 7% (above the exemption) to a tiered system topping out at 9.9% can mean tens of thousands of dollars in additional tax for large transactions.

• Timing of Asset Sales: With the new higher tier, the timing of selling appreciated assets becomes even more strategic. Investors might consider spreading out large gains over multiple years, if feasible, to potentially stay below or minimize exposure to the 9.9% bracket. However, market conditions and individual financial goals must also be weighed.

• Tax-Loss Harvesting: This strategy, which involves selling investments at a loss to offset capital gains, becomes more valuable. Losses can offset gains taxed at both the 7% and 9.9% rates.

• Asset Location: Consider the type of accounts where assets are held. Capital gains within tax-advantaged retirement accounts (like 401(k)s and IRAs) remain exempt from this state tax. Maximizing contributions to these accounts can be beneficial. For taxable accounts, think about which assets are most likely to generate large long-term capital gains and whether their location is optimal.

• Charitable Giving Strategies: For charitably inclined individuals, strategies like donating appreciated stock directly to a charity or utilizing tools like Donor-Advised Funds (DAFs) can be effective. This not only supports causes you care about but can also help avoid capital gains tax on the donated assets. The state's specific rules on charitable deductions against capital gains should be reviewed.

• Review of Estate and Business Succession Plans: For business owners, the interaction of the capital gains tax with estate planning and business succession needs careful review, especially concerning the sale or transfer of business interests that don't qualify for an exemption.

• Residency Considerations: While a drastic step, some individuals with very high and consistent capital gains may re-evaluate their state of residency. However, this involves complex legal and financial considerations beyond just tax.

• Importance of Professional Advice: The nuances of the new law, combined with individual financial situations, make professional guidance essential. Consulting with a qualified financial advisor and a tax professional is highly recommended to navigate these changes effectively and develop a personalized strategy.

Conclusion

The 2025 changes to Washington State's capital gains tax introduce a more progressive structure, with a higher top rate for significant investment gains. While the standard exemption and various asset class exemptions provide some relief, individuals and families with substantial taxable investments will need to be more strategic in their financial planning. Understanding the new tiered rates, the retroactive application, and available planning strategies is key to mitigating potential tax impacts and aligning your financial decisions with your long-term goals.

Take the Next Step

Navigating these new tax laws can be complex. If you have questions about how Washington's updated capital gains tax impacts your financial plan, investment strategy, or estate planning, we encourage you to reach out. Our team is here to help you understand these changes and develop strategies tailored to your unique situation.

Contact us today for a consultation.

Resources

For official information on Washington State's capital gains tax, please refer to:

Washington State Department of Revenue Capital Gains Tax: The DOR website is the primary source for tax forms, publications, and official guidance.  

Washington State Legislature Website: You can find the full text of Senate Bill 5813 and Senate Bill 5314, as well as other legislative information.