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Tax Reporting

Washington Has No Income Tax — But It Can Still Tax Your Investment Gains

Washington is one of the handful of US states with no personal income tax, and a lot of investors treat that as "no state tax on my portfolio, period." For most people, that's true. But since 2022, Washington has had a separate capital gains excise tax that applies once a single year's long-term gains get large enough — and because it isn't an income tax, it's easy to miss until the year it actually applies to you.

Who this affects: almost nobody in a typical year — the threshold is high. But a single concentrated sale (a big RSU vest liquidation, a founder's stock sale, an unusually large rebalance) can cross it in one year even for someone whose income is otherwise ordinary.

The number that actually matters: $278,000

For 2025, Washington's capital gains tax applies to long-term gains above a standard deduction of $278,000 — one shared amount per individual, married couple, or registered domestic partnership. It is not doubled for joint filers the way some federal thresholds are. This deduction is indexed for inflation each year, so the exact number shifts slightly year to year — check the current figure before relying on it for planning.

Two rates, not one

Once taxable gain (the amount above the deduction) exists, the rate is tiered: 7% on the first $1,000,000 of taxable gain, and 9.9% on anything above that, effective for tax year 2025 onward. Unlike the standard deduction, that $1,000,000 tier boundary is a fixed number — it does not adjust for inflation.

Example: a $1,500,000 long-term gain in one tax year, standard deduction $278,000, leaves $1,222,000 of taxable gain. The first $1,000,000 of that is taxed at 7% ($70,000); the remaining $222,000 at 9.9% ($21,978). Total Washington tax: $91,978 — on top of whatever federal capital gains tax applies separately.

What this tax does not touch

Three carve-outs matter more than the headline rate: real estate sales are entirely exempt, retirement accounts (401(k)s, IRAs, and similar) are entirely exempt, and short-term gains — anything held one year or less — aren't reached by this tax at all. It only ever applies to long-term gains on assets like stocks, bonds, and business interests held outside a retirement account.

The deduction resets every year

Because the standard deduction applies per tax year, not once over a lifetime, a large position doesn't have to be liquidated all at once. Realizing gains just under the threshold across two or three separate tax years, instead of one large sale, can keep some or all of it under Washington tax entirely — the same $278,000 deduction applies again each year. This is a timing decision worth making deliberately rather than by accident, especially around a known liquidity event like an RSU vest or an acquisition payout.

Not tax advice. This explains the mechanics of the tax, not a recommendation for your specific situation — sequencing a large sale across tax years has real tradeoffs (market risk, changing rates, concentration risk) beyond the state tax bill. Talk to a tax professional before making a multi-year sale plan around this threshold.
Zyvo models Washington's tiered capital gains excise tax — both rate tiers, the current standard deduction, and the long-term-only scope — as part of its US state tax coverage, sourced directly from the Washington DOR. Try it in the live demo →
Related reading: Average Cost vs FIFO · The wash sale rule across brokers