Washington 7% Capital Gains Tax + Federal Stack: $1M+ Sales

Washington was a no-income-tax state for most of its modern history. The state has no general personal income tax, no corporate income tax, and historically no capital gains tax. For founders weighing where to live before a business sale, Washington competed with Texas, Florida, Nevada, and Tennessee as a zero-tax destination. That changed in 2022 when the Washington legislature enacted RCW Chapter 82.87, imposing a 7 percent tax on long-term capital gains above an annual standard deduction. The constitutionality was challenged immediately. In March 2023, the Washington Supreme Court upheld the tax in Quinn v. State, ruling that the tax is an excise tax on the privilege of selling capital assets rather than a property tax (the state constitution restricts property taxation in ways that would have made an income tax difficult to enact).

For founders who relocated to Washington before 2022 expecting zero tax on a future sale, the rule change was costly. A $5 million founder exit that would have paid zero state tax in 2021 pays approximately $331,000 in Washington tax in 2026. The QSBS conformity issue makes the federal-state coordination math worse: federal section 1202 excludes the gain at the federal level, but Washington taxes the full federal-pre-exclusion gain. This article walks through the tax mechanics, the narrow exemptions, the federal-state coordination, and the planning options for founders selling at $1 million or more.

RCW 82.87 mechanics: who pays, what is taxed, and how much

The Washington capital gains tax applies to individuals (not entities) who recognize long-term capital gains from the sale or exchange of long-term capital assets allocated to Washington. The standard deduction is $250,000 per filer when enacted, indexed for inflation annually under RCW 82.87.020. For the 2026 tax year, the standard deduction is approximately $270,000 (verify the precise figure with the Washington Department of Revenue annual notice). The tax rate is a flat 7 percent on the gain above the standard deduction.

Several mechanics matter for founders:

• Long-term only. Only gains on capital assets held more than one year are taxed. Short-term capital gains (held one year or less) are not subject to the Washington tax. For founders selling vested stock that has been held more than one year, this is automatic; for founders selling recently-exercised options or recently-vested RSUs, the holding period at the corporate level matters.
• Filing-unit single threshold. The $270K standard deduction is per filing unit, not per individual — meaning a married couple filing the equivalent of "jointly" for Washington purposes uses one $270K deduction, not two. The Washington capital gains tax return is structured to mirror federal filing status. This is different from federal capital gains brackets, which double for MFJ filers.
• Allocation to Washington. The tax applies to gains "allocated to Washington" under RCW 82.87.100. For individuals, tangible personal property (a Washington-located piece of equipment) generates Washington-source gain regardless of seller domicile. Intangible personal property (stock, partnership interests, goodwill, and most business-sale assets) is sourced to the seller's domicile on the date of the sale. A Washington-domiciled founder selling stock in a Delaware corporation operating in California recognizes Washington-source gain because the founder is Washington-domiciled, not because the corporation operates in Washington.
• No federal credit. There is no Washington credit for federal capital gains tax paid. The 7 percent layers on top of the federal 20 percent LTCG plus 3.8 percent NIIT, creating a combined federal-plus-Washington rate of 30.4 percent on amounts above the federal NIIT thresholds.
• Separate filing. The Washington capital gains tax return is filed separately from the federal return, due April 15 of the year following the tax year. The Department of Revenue provides Form CGT.

The small-business exemption: narrow eligibility

RCW 82.87.050(1) provides an exemption for gains from the sale or transfer of all or substantially all of the assets of a qualified family-owned small business. To qualify:

• The business's worldwide gross revenue must not exceed $10.45 million in the 12 months preceding the sale (the threshold is statutorily set at $10 million and adjusted annually for inflation; verify the current figure)
• The taxpayer must have held a qualifying interest in the business for at least 5 years immediately preceding the sale
• Family members must hold a majority of the ownership interests in the business
• The taxpayer must materially participate in the business during the 5-year holding period

The exemption is well-targeted for true family-business sales — a multi-generational restaurant, a family-owned manufacturing operation passing to the next generation, a family farm sold to a strategic buyer. For typical founder exits in technology, professional services, or investor-backed businesses, the exemption rarely applies:

• Venture-backed companies fail the family-majority test because outside investors hold significant equity
• Bootstrapped companies selling above the revenue threshold fail the small-business size test
• Holding-company structures fail because the exemption applies to the sale of underlying business assets or interests, not to a sale of holding-company stock

For founders whose business genuinely fits the exemption criteria, the savings are substantial: the entire gain is exempt from Washington capital gains tax. For most founders, the exemption is unavailable and planning must focus on other paths.

Primary-residence exemption: separate and stacked

RCW 82.87.050(2) exempts gains from the sale of a primary residence regardless of dollar amount. The Washington exemption is more generous than the federal section 121 exclusion ($250K single, $500K MFJ), which it stacks on top of without offset. To qualify for the Washington exemption:

• The residence must have been the seller's primary residence for at least 24 months of the 60 months immediately preceding the sale
• The residence must not have been used as an investment or rental property during the qualifying period

For founders who own a Washington primary residence and a Washington-domiciled business, the residence sale is a separate transaction with its own exemption. A founder selling the family home for $3 million of gain in the same tax year as a $5 million business interest sale recognizes $0 of Washington tax on the residence gain (full exemption) and approximately $331,000 of Washington tax on the business gain ($4,730,000 above the standard deduction times 7 percent).

QSBS interaction: federal exclusion does not flow through

IRC section 1202 allows founders of qualifying C-corporations to exclude up to the greater of $10 million or 10 times adjusted basis from federal capital gains tax on the sale of qualified small business stock held at least 5 years. The federal benefit is meaningful: $2.38 million in federal tax avoided on the first $10 million of qualifying gain at the 23.8 percent federal LTCG-plus-NIIT rate.

Washington does not conform. The Washington tax base under RCW 82.87.040 starts with the gain that would be federally recognized if the section 1202 exclusion did not apply. The full QSBS gain flows into the Washington calculation:

• Federal tax on $10M QSBS gain: $0 (full section 1202 exclusion)
• Washington tax base: $10M minus $270K standard deduction equals $9,730,000
• Washington tax: $9,730,000 times 7 percent equals $681,100
• Effective rate on the full $10M: 6.8 percent

For founders comparing Washington against California for a $10M QSBS sale, Washington saves approximately $649,000 versus California ($1.33M California minus $681K Washington). For founders comparing Washington against Texas, Florida, Nevada, or Tennessee, Washington costs approximately $681,000 more.

Worked example: $5M founder exit, four state comparisons

Lauren is a co-founder of a B2B SaaS company organized as a Delaware C-corporation with operations in Seattle. She holds 25 percent of the equity and the company is sold in a stock sale for $20 million. Lauren's gain: $5 million. Her shares qualify for section 1202 QSBS treatment (held 6 years, original issuance from C-corp incorporation, company never crossed $50M in gross assets during the qualifying period). She will exclude $5 million federally under section 1202 (the full gain fits within the $10M cap).

Scenario A: Lauren is a Washington resident

• Federal tax: $0 (full QSBS exclusion)
• Washington tax: ($5M minus $270K standard deduction) times 7 percent equals $331,100
• Total tax: $331,100
• After-tax proceeds: $4,668,900
• Effective rate: 6.6 percent

Scenario B: Lauren is a California resident

• Federal tax: $0 (full QSBS exclusion at federal level; California does not conform)
• California tax: $5,000,000 times 13.3 percent equals $665,000
• California 1 percent mental-health surcharge (income above $1M): $40,000
• Total tax: $705,000
• After-tax proceeds: $4,295,000
• Effective rate: 14.1 percent

Scenario C: Lauren is a Texas resident

• Federal tax: $0 (full QSBS exclusion)
• Texas tax: $0 (no personal income tax)
• Total tax: $0
• After-tax proceeds: $5,000,000
• Effective rate: 0 percent

Scenario D: Lauren is a Florida resident

• Federal tax: $0 (full QSBS exclusion)
• Florida tax: $0 (no personal income tax)
• Total tax: $0
• After-tax proceeds: $5,000,000
• Effective rate: 0 percent

Cross-state takeaway

On a $5M QSBS-eligible founder exit, Washington costs approximately $331,000 more than Texas or Florida, but approximately $374,000 less than California. The federal QSBS exclusion is preserved in all four states, but only Texas and Florida deliver true zero-state-tax outcomes. Washington is the second-best state choice among the four for this profile, but is no longer in the same category as the true no-income-tax states.

The installment sale option for Washington-resident sellers

IRC section 453 allows installment-sale treatment for gains recognized over multiple tax years. For a Washington-resident founder, an installment sale that spreads the gain across years where each year's recognition falls below the Washington standard deduction can dramatically reduce or eliminate the Washington tax.

Consider a $1.2 million gain on a smaller business sale. Recognized in a single year:

• Washington tax: ($1.2M minus $270K) times 7 percent equals $65,100

Recognized as a 5-year installment with $240,000 of gain per year:

• Year 1 Washington tax: $240,000 is below the $270K standard deduction equals $0
• Years 2 through 5 (assuming the standard deduction remains at or above $270K): $0 each year
• Total Washington tax over 5 years: $0
• Savings versus lump-sum recognition: $65,100

The installment-sale strategy is most effective for total gains within 2 to 3 times the standard deduction (roughly $500K to $800K of gain), where multi-year recognition can keep each year below the $270K threshold. For very large gains ($5M+), the installment sale shifts but does not eliminate the Washington tax because the per-year recognition still exceeds the threshold. The installment sale also creates buyer-credit-risk and interest-imputation issues under section 1274 that must be modeled separately.

Donor-advised funds and charitable bunching

Charitable contributions reduce federal taxable income but do not directly offset the Washington capital gains tax base. The Washington tax under RCW 82.87.040 is calculated on capital gains as defined for federal purposes, before any charitable-contribution itemized deduction. A founder who donates $1 million of stock to a donor-advised fund in the sale year does not reduce the Washington tax — the donated shares are still treated as recognized gain for Washington purposes if the donation is structured as a sale-then-donation rather than a direct stock contribution.

However, charitable contributions of appreciated stock made directly to a DAF or qualified charity (not sold first) avoid recognition of the gain for both federal and Washington purposes. A founder who plans to give $1 million to charity should contribute the appreciated stock directly to the DAF before the sale closes, transferring the basis and the embedded gain to the charitable entity. This eliminates both federal and Washington tax on the donated portion. For a 7 percent Washington tax, donating $1 million of pre-sale appreciated stock saves $70,000 of Washington tax beyond the federal charitable-deduction value.

Departure planning: leaving Washington before the sale

For founders who initially moved to Washington for tax purposes, the 7 percent capital gains tax has changed the relocation calculus. Founders selling QSBS-eligible stock face approximately $681K of Washington tax on $10M of gain — meaningful enough that some founders relocate again from Washington to Texas, Florida, or Nevada before the sale.

Washington's residency framework for the capital gains tax follows the seller's domicile at the time of the sale under RCW 82.87.100. The state has not yet developed an aggressive audit posture comparable to California's FTB; the tax has only been in effect since the 2023 tax year and the Department of Revenue's audit infrastructure for the new tax is still developing. Practitioners advise approaching a Washington-to-no-tax-state move with the same documentation discipline as a California departure: change of driver's license and voter registration within 30 days, sell or lease the Washington primary residence, move the family if applicable, transfer banking and professional service providers, limit Washington presence to under 45 days per year during and after the transition, and file the Washington capital gains tax return correctly for the partial-year transition.

The cost-benefit analysis on a second relocation depends on the size of the sale. For a $1 million gain, the Washington tax is approximately $51,000 — relocating again to avoid that tax does not justify the disruption. For a $10 million gain, the Washington tax is approximately $681,000 — relocating for a 12-month period to Texas or Florida saves enough to materially affect the calculus. For a $25 million gain, the Washington tax is approximately $1.73 million — relocation almost certainly justified financially, family circumstances permitting.

Federal coordination on the NIIT

Washington does not provide any credit or deduction for the federal 3.8 percent net investment income tax under section 1411. The NIIT applies to capital gains above the federal threshold ($200K MAGI for single filers, $250K MFJ). For Washington-resident founders selling above the NIIT thresholds, the federal NIIT and the Washington 7 percent capital gains tax stack with no offset:

• Federal LTCG rate (20 percent above $533K single threshold for 2026): on the gain
• Federal NIIT (3.8 percent): on the gain
• Washington capital gains tax (7 percent): on the gain above the standard deduction
• Combined effective rate: 30.4 percent on amounts above all three thresholds, applied to non-QSBS gain

For QSBS-eligible gain, federal LTCG and NIIT are eliminated by the section 1202 exclusion, but the Washington 7 percent layer remains. This is the critical conformity gap for Washington-resident founders.

Where the opposite is right: staying in Washington

The relocation analysis assumes the founder is willing to leave Washington for tax reasons. For many founders, Seattle is a permanent life choice — community, climate, employment ecosystem, school options, family ties. The 7 percent Washington capital gains tax on a sale, while meaningful, may be a reasonable cost for the life Washington offers compared to Texas or Florida alternatives.

Cases where staying in Washington makes financial sense even on large sales:

• Sale gain is structured to fit largely within the standard deduction (small founder exit, $250K-$500K gain)
• Family circumstances make relocation impractical (school-age children at critical academic transitions, aging parent in Washington, spouse with non-portable career)
• Founder values the Pacific Northwest community, climate, or geography enough to absorb the 7 percent
• Multiple smaller sales structured as installment recognition that keeps annual gain below the threshold
• Charitable-bunching strategies that reduce the recognized gain through pre-sale donation of appreciated stock

Key takeaways

• Washington is no longer a zero-tax state for business sales. RCW Chapter 82.87 imposes a 7 percent tax on long-term capital gains above a $270,000 standard deduction (2026 indexed), with no credit for federal LTCG or NIIT. On a $5M founder exit, the Washington bill is approximately $331,000.
• Washington does not conform to QSBS Section 1202. The federal exclusion preserves federal tax savings, but the Washington 7 percent layer applies to the full federally-pre-exclusion gain. A $10M QSBS sale incurs approximately $681,000 of Washington tax that does not exist in Texas, Florida, Nevada, or Tennessee.
• The small-business exemption in RCW 82.87.050 has narrow eligibility — family-owned businesses below $10.45M in revenue with a 5-year holding period and family-majority ownership. Most venture-backed and investor-owned founder exits fail one or more of these tests.
• The primary-residence exemption is unlimited in dollar amount and separate from the federal section 121 exclusion. Washington-resident founders selling a Washington primary residence in the same year as a business interest pay zero Washington tax on the residence gain regardless of dollar amount.
• Installment-sale treatment under IRC section 453 can dramatically reduce the Washington tax for gains in the $500K to $800K range by spreading recognition across multiple years where each year falls below the standard deduction. For larger gains, the strategy shifts but does not eliminate the tax.
• Charitable contributions of appreciated stock made directly to a donor-advised fund or qualified charity before sale avoid both federal and Washington tax on the donated portion. Sale-then-donation does not work — the stock must be transferred to the charitable entity before recognition.
• For founders selling at $10M+, a second relocation from Washington to Texas, Florida, Nevada, or Tennessee can be justified financially, but the move should follow the standard 6 to 12 month documentation protocol. For smaller sales, the relocation disruption rarely justifies the tax savings.
• The 7 percent Washington capital gains tax is meaningful but smaller than California exposure. Washington remains a favorable destination versus California (which charges 13.3 percent and does not conform to QSBS), but Texas, Florida, Nevada, and Tennessee deliver true zero-state-tax outcomes that Washington no longer matches.