Washington's Capital Gains Tax Asks Who Recognizes the Gain
Washington taxes only long-term gains, only of individuals, with a 2.9 percent surtax above $1 million. Loss harvesting helps at the margin. The larger question is whether the client should be the taxpayer recognizing the gain at all.
Brent Sullivan at Tax Alpha Insider flagged a counterintuitive wrinkle in Washington's capital gains tax: in Washington, a long term capital loss can be worth more than a short term loss. Advisors trained on the federal rules think of short term losses as the valuable ones, because they offset gains taxed at ordinary rates. Washington's tax applies only to long term gains, so only long term losses do any work against it.1 A Washington taxpayer with large long term gains may find that the losses he harvested for federal purposes do nothing for his state bill.
The tax in brief
Washington imposes a 7 percent tax on an individual's Washington capital gains above a standard deduction, $250,000 when enacted and indexed since, and, beginning with 2025, an additional 2.9 percent on gains above $1 million, for a combined 9.9 percent at the top.2 Gains on real estate and on interests in entities to the extent attributable to real estate are exempt, and gains on intangible property are allocated to Washington if the taxpayer was domiciled there at the time of sale.3
Only individuals are subject to the tax. But an individual is treated as the beneficial owner of assets held through a partnership, an LLC, an S corporation or a grantor trust, and a trust that is not a grantor trust for federal purposes is nonetheless treated as one for Washington purposes if the settlor's transfer to it was an incomplete gift.4 So a grantor trust and an incomplete gift nongrantor trust are both pulled back into the settlor's Washington computation.
The better question
Tax loss harvesting asks how to offset a gain. It is a reactive tool. For a client with concentrated stock, founder shares, a private company interest or a likely liquidity event, the bigger question is whether the client should be the person recognizing the gain in the first place. That is where trust planning becomes powerful, and Washington's rules make it especially so.
Four structures
- A completed gift nongrantor trust, such as a South Dakota nongrantor asset protection trust, is a separate taxpayer and not an individual. Funded before a sale, it moves the future appreciation and the sale proceeds off the client's balance sheet while adding estate tax planning, asset protection and family governance. The gift must be complete and the trust must be a nongrantor trust under both federal and Washington law, which rules out the usual incomplete gift designs.
- A charitable remainder unitrust lets a client with a low basis position and charitable intent diversify inside the trust without a taxable sale by the individual, converting the asset into a lifetime income stream and a charitable remainder.
- A South Dakota community property trust lets a married couple in a separate property state hold assets as community property, so that both halves receive a full basis step up at the first death and the survivor can sell without gain.5 For a Washington couple that already lives under community property law the issue is different, but for couples who have moved from a separate property state the trust can convert what they brought with them.
- Other nongrantor and state tax sensitive structures, where trust status, situs, distribution design and timing change the analysis for a high income or high gain client.
What does not work
Grantor trusts and incomplete gift structures do not help, because Washington attributes their gains to the settlor. And none of this is a last minute fix. The structures have to be designed before the liquidity event, before the concentrated position is sold and before tax season becomes triage.
The details matter, and not every trust helps. But for the right client with the right facts, planned early enough, the answer is not merely to harvest more losses. It is to build a better structure.
Notes
- RCW 82.87.020 defines adjusted capital gain by starting from federal net long term capital gain; RCW 82.87.040(3) provides that a negative Washington capital gain produces no tax and no carryover. ↩
- RCW 82.87.040(1) and 82.87.060; Engrossed Substitute Senate Bill 5813, ch. 421, Laws of 2025. The state supreme court upheld the tax as an excise tax in Quinn v. State, 1 Wn.3d 453 (2023). ↩
- RCW 82.87.050 and 82.87.100. ↩
- RCW 82.87.040(4)(b). ↩
- SDCL ch. 55-17; I.R.C. section 1014(b)(6). ↩
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.