The Washington Legislature recently passed a new capital gains tax. Starting Jan. 1, 2022, Washington residents will owe a 7 percent flat tax on their federal capital gains if their profits exceed $250,000 annually.

Between a lengthy list of exemptions and questions about whether this could pave the way for a state income tax, it can be hard to know how this tax may impact you.

UW Law Professor Scott Schumacher discusses the important elements of the new tax and its implications for average Washington residents.

Read the Transcript

Scott Schumacher: Hi, I'm Scott Schumacher and I'm a professor of law at the University of Washington School of Law. I'm delighted to talk to you about the new Washington state capital gains tax.

Three-Minute Legal Tips: What is a capital gains tax?

SS: Well, a capital gains tax is just a tax on certain type of income, a capital asset. So, it's an asset that you hold rather than having income from employment or interest income or dividend income. So, if you sell a capital asset and the gain on that is subject to capital gains tax. So, it's just a certain kind of income.

TMLT: Can you tell us about the recent capital gains tax that was passed by the Washington legislature?

SS: It's a seven percent flat tax that's calculated on a person's federal capital gains. So, you just look at what you reported as the net long-term capital gains on your federal tax return, you're 1040, and it's a seven percent tax on that. However, there's a pretty large standard deduction that you get to subtract from those capital gains and there's certain kinds of gains that are exempt from the tax.

TMLT: Who will this law affect?

SS: Well, it applies to individuals who are legal residents of Washington and to the sale of property by non-residents if the property is located in Washington. It's a little more complicated than that, but that's just sort of the basic rule and it only applies to individuals and married couples with capital gains more than $250,000 in a year. So, again if you have capital gains of less than $250,000 in a year you won't be subject to the tax. Also, real estate sales are exempt, so if you sell your house and a lot of people, you know, especially in this market will have, you know, gain on the sale of their personal residence that's more than $250,000. But the tax doesn't apply to that. Also assets that are held in retirement accounts, smaller family-owned businesses and some other businesses are exempt from the tax. And the tax, the capital gains tax, does not apply to corporations or other entities

TMLT: How will this law affect an average Washingtonian?

SS: You know, I don't think this will affect the average Washingtonian. The average person I don't think has capital gains of more than $250,000 per year on sales of stock or assets like that. I mean certainly there's plenty of people in Washington that have large stock holdings that will be affected by that, but the average Washingtonian I don't think will be affected. Also, the new tax starts January 1st of 2022, so if you're going to sell, have large capital gains that would be subject to the tax do it this year.

TMLT: Will this pave the way for a Washington state income tax?

SS: You know, I don't think to the extent this is an income tax—and I think it is—it's it's going to be found unconstitutional. It's already been challenged in courts and so we'll see probably in a year or so whether it's upheld. So, the only way that this will be determined to be constitutional is if a court finds that it's not a tax on income and more like a license fee or a fee for using something. Again, I don't think that applies here. So, no matter if this is upheld and is determined to be constitutional, it's because it's not an income tax, so there's no way that this will pave the way for a state income tax. That would require an amendment of the state constitution.