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Washington Supreme Court upholds capital gains tax

TAX ALERT | March 27, 2023

Authored by RSM US LLP

Executive summary:

On March 24, 2023, The Washington Supreme Court has upheld the state’s capital gains tax, ruling that the levy was a lawful excise tax, not an unconstitutional income tax. The case ends a long and controversial debate over the legality of the capital gains tax enacted in 2021. The first returns and payments of the excise tax are due on April 18, 2023.

Washington Supreme Court upholds capital gains tax

On March 24, 2023, the Washington Supreme Court determined in a seven to two decision that Washington’s long-term capital gains tax is constitutional, paving the way for the first returns and payment of tax to be due on April 18, 2023. A filing extension will be granted if the taxpayer files a federal extension and requests a Washington extension prior to the original due date, however the tax must still be paid by April 18th (April 15th in future years). Any tax paid after that date is subject to a late payment penalty of up to 29% of the tax due.

In its decision, the Washington Supreme Court characterized the Washington capital gains tax as an excise tax, reversing a lower court decision that determined the Washington capital gains tax was an unconstitutional tax on property. Washington case law establishes income as property, and taxes on property in Washington have strict uniformity and levy limitations that the capital gains tax would violate if it were characterized as such.

By characterizing the Washington capital gains tax as an excise tax, the Washington Supreme Court declined to overturn Culliton v. Chase, 174 Wash. 363, 25 P.2d 81 (1933) at this time. Culliton is a landmark case which defines graduated property taxes or property taxes over 1% as unconstitutional in Washington, and which some intervenors urged the Washington Supreme Court to overturn. These intervenors argued Culliton is one, incorrect and harmful and two, its legal underpinnings have eroded. Overturning Culliton would give momentum to proponents of a Washington individual income tax.

Rather, the Washington Supreme Court determined that the long-term capital gains tax is a constitutional excise tax, finding the tax “is appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.” The capital gains tax, according to the majority decision, is not imposed on the mere ownership of capital assets, but instead is imposed on the sale or exchange of long-term capital assets. 

Emphasizing that the taxable event is the transaction itself, and not upon the realization of such gains, the Washington Supreme Court held, “The tax is not levied on capital gains; rather, it is measured by capital gains. Our cases unequivocally hold that excise taxes levied on a particular privilege or incident of property ownership may be measured by income, and this does not transform the fundamental nature of the tax.”

Although the IRS defines capital gains as income and the Washington capital gains tax relies on federal income tax reporting, the Washington Supreme Court found these facts not to be determinative. In addition, the Washington Supreme Court found the long-term capital gains tax to comport with the Washington state constitution’s privileges and immunities clause and the federal dormant commerce clause.

Prior to the issuance of this decision, the Washington Supreme Court issued a stay on Nov. 30, 2022 to permit the Washington Department of Revenue to start collecting the capital gains tax while this lawsuit was pending. In the event this tax was found to be unconstitutional, any capital gains tax already collected would have to be refunded back to taxpayers. 

Since this is no longer the case, taxpayers subject to the long-term capital gains tax should be prepared to file returns annually. Although a six-month extension is available to file a return, payment of tax for calendar year 2022 is due April 18, 2023 (normally April 15). 

The capital gains tax applies to individuals at a rate of 7% on net gains in excess of $250,000 in a calendar year, with no capital gains tax imposed if net gains are less than $250,000 in a calendar year beginning Jan. 1, 2022. Statutory exemptions include, but are not limited to, sales of real estate and transactions made through certain common retirement accounts. Statutory deductions are available for the sale of a qualified family-owned small business and qualifying charitable donations in excess of $250,000 per year, with the deduction not to exceed $100,000. Only individuals owing long-term capital gains tax are required to file annual returns. 

For intangible personal property such as stocks or bonds, gains are allocated to Washington if the individual is domiciled in Washington during the year the sale or exchange occurred. For tangible personal property, gains are allocated to Washington if the property was located in Washington at the time of sale or if the property was not located in Washington at the time of sale but the property was located in Washington in the same year or the year before the sale took place, the individual was a Washington resident at the time of the sale, and the sale was not subject to an income or excise tax by another jurisdiction.


This decision establishes the Washington capital gains tax as a valid excise tax. Washington residents making sales or exchanges of long-term capital assets on or after Jan. 1, 2022 and those who have property located in the state may be subject to the capital gains tax. You should consult with your state and local tax advisor to determine whether Washington’s capital gains tax will apply to you. In addition, firms and individuals should consult with their Washington state advisors for further developments concerning this tax.

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This article was written by David Brunori, Kirsten Moritz-Baune and originally appeared on Mar 27, 2023.
2022 RSM US LLP. All rights reserved.

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