DOR begins implementing capital gains tax while awaiting decision by Washington State Supreme Court

The Department of Revenue (DOR) has begun implementing collection of the new state capital gains tax approved by the Legislature in 2021. Meanwhile, it is awaiting a decision on the constitutionality of the tax by the Washington State Supreme Court, which heard oral arguments on January 26. The capital gains tax is a seven percent tax on the gains over $250,000 per year from the sale or exchange of long-term capital assets such as stocks and bonds and due on April 15 for the previous year.

In early 2022, a Douglas County superior court found the capital gains tax unconstitutional, and the decision was appealed directly to the Washington State Supreme Court. The supreme court issued a stay of the lower court decision to allow the state to begin collecting the tax this year, pending the outcome of the case. The court will determine if the tax was an income tax or an excise tax, and whether it violates the property tax uniformity clause of the Washington State Constitution because the tax only applies to gains over $250,000.

The court’s ruling is not expected to affect the operating budget currently being drafted for 2023-25, unless the court issues a ruling prior to the end of the session. However, if the court upholds the lower court’s decision, the revenues collected this year would need to be refunded. Revenues from the new tax are dedicated to funding for education, early learning, and childcare programs.