Washington Excise Tax Alert

This content was updated to include developments stemming from the January 26 Supreme Court hearing.

Washington state residents and nonresidents should prepare for the new excise tax, a revenue raiser to fund educational efforts. Effective January 1, 2022, Washington State Department of Revenue (“Department”) implemented a new 7% excise tax on long-term capital gains for individuals. This excise tax has not gone without legal challenges. In March 2022, the excise tax was deemed unconstitutional by the Douglas County Supreme Court. The state appealed the decision to the Washington State Supreme Court, where the case is pending. The first excise tax payment is due April 18, 2023, so taxpayers should be aware of the following rules, regardless of the legal entanglements.

• Long-term capital gains subject to the excise tax include gains from sale of intangible property such as stock and bonds for Washington residents, and tangible assets allocable to Washington for both Washington residents and nonresidents.
• Cryptocurrency held long term by Washington residents are subject to the excise tax.
• Real estate gains and gains through retirement plans are exempt.
• The beneficial owners of the long-term capital assets are responsible for the payment of the tax, including individuals who are owners of pass-through entities, disregarded entities, or grantor trusts. Special rules apply to certain non-grantor trusts.
• Short-term capital losses may not offset long-term capital gains.
• Taxpayers may not carryover Washington capital losses to a future year.
• Washington State generally conforms to the federal long-term capital gain recognition rules (e.g., installment payments). Additional guidance on this topic is pending.
• A deduction of $250,000 per individual is available. Joint filers only receive one $250,000 deduction.
• Credits are available for gains subject to the Washington B&O tax and for taxes paid to other states.
• Due dates follow the federal individual income tax filing dates (April 15 for most taxpayers).
• The Washington excise tax due dates may be extended if the federal individual income tax return is extended. Note this is an extension of time to file, not an extension to pay.
• Penalties and interest will apply for late filings and late payments.

On Thursday, January 26, 2023, the Washington Supreme court held oral arguments. The discussions centered on whether the excise tax on long-term capital gains is an excise tax (triggered from a sale or exchange) or an income tax is (generated due to the recognition of income).  Arguments debated if the capital gains tax is constitutional.  A request was submitted for the Supreme Court to decide on the case before the April 18, 2023 deadline, but the Justices did not appear to commit to a date. Taxpayers should consider making excise tax payments while the decision is pending in order to be in compliance with the law. If the Washington excise tax is deemed unconstitutional, the Department must issue refunds to the individual taxpayer within 30 days. Interest will accrue if the Department fails to do so. Filings must be submitted online, although forms are not yet available, and the Department continues to issue guidance on this matter. We’ll keep you up-to-date as information on the excise tax and the court’s decision becomes available – and, as always, consult with your tax advisor before taking action.