Investing

Washington's Capital Gains Excise Tax: Rates, Exemption, and Surcharge

By GetTaxCalculator Editorial Team· Published 2026-09-12

Washington has no income tax on wages, but it does impose a capital gains excise tax on long-term capital gains above a high exemption threshold. The tax is structured in tiers: 7% on gains up to $1,000,000 (above the exemption) and 10% on gains above $1,000,000, effective tax year 2025.

History: from passage to Supreme Court

Washington's capital gains excise tax was passed by the state legislature in 2021 and took effect for tax year 2022. It was immediately challenged in court. In 2023, the Washington Supreme Court upheld the tax in Quinn v. State of Washington, ruling that it is a lawful excise tax on the privilege of selling capital assets, not a graduated income tax. Because the Washington Constitution prohibits graduated income taxes, the court's classification was essential to the tax's survival.

In 2025, the legislature amended the tax through ESSB 5813 (Ch. 421, Laws of 2025) to add a second tier with a surcharge, creating the current two-rate structure retroactive to tax year 2025. The amendment was designed to raise additional revenue from very large capital gains transactions.

The standard deduction (exemption threshold)

Before any tax is owed, long-term capital gains are reduced by a standard deduction that functions as an exemption threshold. For tax year 2025, this threshold is approximately $278,000. Note (TODO_VERIFY): The $278,000 figure is the confirmed 2025 tax-year threshold from WA DOR. The 2026 tax-year threshold has not yet been announced by WA DOR as of this post's date and will be updated when published (expected late 2026).

The threshold is adjusted annually for CPI inflation. This means a taxpayer with long-term capital gains of $278,000 or less in 2025 owes no Washington capital gains excise tax at all.

Example: A single filer with $350,000 in long-term capital gains in 2025 has taxable gains for Washington purposes of $350,000 minus $278,000 = $72,000. The excise tax would be $72,000 x 7% = $5,040.

The two tax tiers

Washington's capital gains excise tax uses two tiers based on the amount of long-term capital gains above the standard deduction:

Tier 1 (7%): Applies to long-term capital gains above the standard deduction up to $1,000,000. Source: WA DOR.
Tier 2 (10%): Applies to long-term capital gains above $1,000,000. This combines the base 7% rate with a 2.9% surcharge. The $1,000,000 threshold is not indexed for inflation. Source: WA DOR Special Notice (ESSB 5813).

Worked example: $1,500,000 in long-term capital gains (2025)

Standard deduction: $278,000
Taxable gains: $1,500,000 minus $278,000 = $1,222,000
Tier 1 tax: $1,000,000 x 7% = $70,000
Tier 2 tax: $222,000 x 10% = $21,978
Total Washington excise tax: $91,978

What is covered

The Washington capital gains excise tax applies to long-term capital gains from the sale of:

Stocks and bonds
Mutual fund shares
Exchange-traded funds (ETFs)
Other investment securities held in taxable accounts

Only long-term gains (assets held more than one year) are subject to the tax. Short-term gains are not covered.

What is excluded

Several categories of gains are excluded from the Washington capital gains excise tax:

Real estate: The sale of real property located in Washington (or anywhere) is excluded. This is one of the broadest exclusions and means most home sales and rental property sales are not subject to the excise tax.
Retirement accounts: Gains inside IRAs, 401(k)s, 403(b)s, and other qualified plans are excluded. The excise tax applies only to gains realized in taxable accounts.
Livestock and timber: Gains from the sale of livestock or timber held in the ordinary course of a farming or timber business are excluded.
Certain small business sales: Gains that qualify for the federal Section 1202 exclusion (qualified small business stock) may also be excluded at the state level. Consult a tax professional for details.
Gains excluded at the federal level: If a gain is excluded from federal gross income (such as under the home sale exclusion), it is also excluded for Washington purposes.

How to file and pay

Washington's capital gains excise tax is separate from your federal return. You file directly with the Washington Department of Revenue. The annual capital gains return is generally due April 15 of the year after the tax year (the same due date as the federal return). Extensions of time to file are available, but any tax owed is due by the original deadline.

You do not report or pay this tax on your IRS Form 1040. Keep records of your Washington-source long-term capital gains, your cost basis, and any exclusions you are claiming.

Interaction with federal capital gains tax

Washington's excise tax stacks on top of your federal capital gains tax. They are entirely separate calculations.

Federal long-term capital gains tax rates for 2026 are:

0%: Taxable income up to $49,450 (single) or $98,900 (married filing jointly).
15%: Up to $545,500 (single) or $613,700 (MFJ).
20%: Above $545,500 (single) or $613,700 (MFJ).

Source: Rev. Proc. 2025-32, section 4.03.

High-income Washington residents may also owe the 3.8% Net Investment Income Tax (NIIT) on top of both the federal capital gains rate and the Washington excise tax. See the NIIT guide for the income thresholds and calculation method.

Frequently Asked Questions

Does Washington state have a capital gains tax?

Yes. Washington does not have a general income tax, but it does impose a capital gains excise tax on long-term capital gains above a standard deduction threshold (approximately $278,000 for tax year 2025, indexed for inflation). The tax is 7% on gains up to $1,000,000 above the threshold, and 9.9% on gains above $1,000,000.

Is Washington's capital gains tax an income tax or an excise tax?

It is an excise tax, not an income tax. The Washington Supreme Court upheld the tax in 2023 as a lawful excise tax on the sale of capital assets. This distinction matters because the Washington Constitution prohibits graduated income taxes. The court ruled that a tax on the privilege of selling capital assets is an excise tax, not an income tax.

What is the Washington capital gains exemption threshold?

For tax year 2025, the standard deduction (exemption threshold) is $278,000 (TODO_VERIFY: this figure is from WA DOR for tax year 2025; the 2026 threshold has not yet been announced as of the date of this post). The threshold is adjusted annually for CPI inflation. Gains below the threshold are not subject to the excise tax.

Does Washington's capital gains tax apply to real estate sales?

Generally, no. Real estate sold in Washington is excluded from the capital gains excise tax. This is one of the most significant exclusions. However, gains from real estate investment trusts (REITs) traded as securities may be subject to the tax. Consult a tax professional for transactions involving real estate-related securities.

Does Washington's capital gains tax apply to short-term gains?

No. The Washington capital gains excise tax applies only to long-term capital gains (assets held more than one year). Short-term capital gains are not subject to the Washington excise tax.

Do I file the Washington capital gains tax with my federal return?

No. Washington's capital gains excise tax is filed separately with the Washington Department of Revenue (WA DOR). It is not part of your federal return. The annual return is generally due April 15 of the year following the tax year.

Does Washington's excise tax stack on top of federal capital gains tax?

Yes. If you owe Washington's capital gains excise tax, it is in addition to the federal long-term capital gains tax (0%, 15%, or 20%) and any applicable 3.8% Net Investment Income Tax. The state and federal taxes are calculated and paid separately.