Washington State is making headlines again with significant changes to its tax code. A higher capital gains tax rate for top earners is part of a sweeping budget package signed into law last week by Gov. Bob Ferguson.
“To get a budget in a challenging situation to the finish line, it’s going to require working together and a lot of compromise,” Ferguson said of the bill. “I believe we accomplished that with this budget.”
Alongside the capital gains tax hike, the legislation raises the state’s gas tax rate (more on that below) and estate tax exemption. It also increases business taxes and introduces new sales taxes on certain services.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Overall, the biennial budget appropriates about $77.8 billion, a 6.5% increase over the previous period.
But, the state’s capital gains tax, first implemented in 2022, has arguably been one of Washington's most debated fiscal policies in recent years. Two years ago, the state’s Supreme Court upheld the capital gains tax, and voters rejected a proposed tax repeal during last year’s November elections.
So, what’s changing for 2025 and who’s affected? Read on.
New WA capital gains tax rate takes effect for 2025
Washington’s capital gains tax initially imposed a 7% tax on long-term capital gains above an annual exemption ($270,000 for 2024, with inflation adjustments).
The tax applies to profits from the sale of stocks, bonds, and other non-retirement assets, while exempting real estate, retirement accounts, and many small business sales.
With the passage of this bill, a new 2.9% surcharge applies to net long-term capital gains exceeding $1 million above the exemption, effective retroactively from January 1, 2025.
That brings the top rate to 9.9% for the largest gains.
Here’s how the new structure works:
Gains up to the exemption | No Tax |
Gains between the exemption and $1 million above it | 7% Tax |
Gains above $1 million over the exemption | 9.9% Tax |
Proponents say the structure is designed to target the state’s highest earners, with fewer than 8,200 households expected to be affected.
The new law also allows for up to $100,000 in charitable deductions and continues to exempt real estate and retirement accounts, meaning most Washingtonians won’t see any direct impact.
Opposition to Washington’s capital gains tax
Some critics have argued that, particularly since Washington is a state with no income tax, the capital gains levy harms small businesses and innovation.
- The measure was challenged in court as an unconstitutional income tax.
- However, the Washington Supreme Court upheld the tax in 2023, and the U.S. Supreme Court declined to hear an appeal.
- The capital gains debate peaked during the 2024 election, when Initiative 2109, a measure to repeal the capital gains tax, appeared on the state’s November ballot.
As Kiplinger reported, voters rejected the repeal effort, with over 63% voting “no.”
Additionally, the capital gains tax has sparked warnings of “wealth flight.” Some critics worried that high-income individuals and entrepreneurs would leave Washington for states with lower or no capital gains taxes.
However, data tells a different story. In its first year, the tax generated $786 million — well above projections — while a subsequent drop to $433 million was tied to market volatility, not a mass exodus of wealthy residents, according to the state’s Department of Revenue.
Essentially, state data and independent analysis haven’t found a significant uptick in out-migration due to the tax.
State capital gains tax rates
Though it’s worth noting that some other states are moving away from capital gains taxes.
Missouri, for example, could become the first state to eliminate its capital gains tax. For more information, see Missouri Leads on Capital Gains Tax Repeal.
With its new 9.9% top capital gains rate, Washington now matches Oregon and sits just below California (13.3%) and Hawaii (11%), according to the Tax Foundation.
However, Washington’s high exemption threshold means a much smaller percentage of residents are subject to the tax compared to those states.
As noted, the law contains some exemptions for real estate, retirement accounts, and many small businesses, which supporters say are designed to keep the tax targeted at the state’s wealthiest investors.
Still, since the new rates take effect retroactively from January 1, 2025, affected taxpayers will need to account for the higher rate when filing their 2025 returns in April 2026.
Washington gas tax hike?
The 2025 Washington budget package brings several other notable tax changes.
- The new transportation budget pushes the state gas tax up by 6 cents per gallon for regular fuel and 12 cents for diesel starting July 1.
- That will raise the gas tax from 49.4 to 55.4 cents per gallon, when Washington is already among the states with the highest gas taxes.
- After that, the tax will automatically climb by 2% each year beginning in mid-2026.
Some state leaders say this move is needed to keep road and ferry projects from stalling out as construction costs rise and the budget gap widens. Though even the governor acknowledged the challenges involved.
“The people of the state of Washington expect us to invest in those projects, but we have limited revenue options right now. The gas tax, unfortunately, is one of them,” Ferguson told reporters.
Beyond the gas tax, in Washington, the estate tax exemption rises to $3 million, while the top estate tax rate jumps from 20% to 35% for estates over $9 million.
State lawmakers also approved new sales taxes on services like temporary staffing and advertising, a tax on rented self-storage units, and new levies related to electric vehicle credits.
Related
-
Moves to Manage the Soaring Costs of Owning a CarIt's costing more and more to keep a car on the road, but you can drive some costs down. Here's how to get a better deal on insurance premiums, repairs and gas
-
Here's What You'd Have If You Invested $1,000 Into Coca-Cola Stock 20 Years AgoEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market over the long term.
-
Capital Gains Tax Quiz: How Well Do You Really Know IRS Investment Tax Rules?Quiz Take our capital gains tax quiz to test your investment taxes knowledge. Learn about loss rules, holding periods, and tax incentives that could impact your savings.
-
6 Tax Reasons to Convert Your IRA to a Roth (and When You Shouldn't)Retirement Taxes Here’s how converting your traditional retirement account to a Roth IRA can boost your nest egg — but avoid these costly scenarios.
-
3 Ways High-Income Earners Can Maximize Their Charitable Donations in 2025Tax Deductions New charitable giving tax rules will soon lower your deduction for donations to charity — here’s what you should do now.
-
Another State Bans Capital Gains Taxes: Will More Follow in 2026?Capital Gains A constitutional amendment blocking future taxes on realized and unrealized capital could raise interesting questions for other states.
-
Emergency Tax Bill Ends $6,000 Senior Deduction and Tip, Overtime Tax Breaks in D.C.Tax Law Here’s how state tax conformity rules could immediately raise your income tax liability.
-
New RMD Rules: Can You Pass This Retirement Distributions Tax Quiz?Quiz Take our RMD quiz to test your retirement tax knowledge. Learn about RMD rules, IRS deadlines, and tax penalties that could shrink your savings.
-
10 Retirement Tax Plan Moves to Make Before December 31Retirement Taxes Proactively reviewing your health coverage, RMDs and IRAs can lower retirement taxes in 2025 and 2026. Here’s how.
-
IRS Updates Capital Gains Tax Thresholds for 2026: Here’s What’s NewCapital Gains The IRS has increased the capital gains tax income thresholds for 2026. You'll need this information to help minimize your tax burden.
