Washington Income Tax: Capital Gains, Payroll Deductions, and Exemptions

Washington does not have a state income tax on wages, salaries, tips, or other earned income. No state return, no state withholding on your paycheck for income tax purposes. That said, Washington does tax large investment profits at 7%, and two state programs take small premiums out of your wages. If you live and work in Washington, this is what actually comes out of your income and what doesn’t.

Why Wages Aren’t Taxed

The Washington Supreme Court decided in 1933, in Culliton v. Chase, that income counts as “property” under Article VII, Section 1 of the state constitution, which requires taxes to be uniform on the same class of property.¹ A graduated income tax would apply different rates to the same class of property and would fail that test. That ruling has held for nearly a century, and changing it would take a constitutional amendment approved by voters. The state funds itself instead through sales taxes, business taxes, and the capital gains tax described below.

The 7% Capital Gains Tax

Washington imposes a 7% excise tax on profits from selling long-term capital assets such as stocks, bonds, and business interests held for more than one year.² The tax only hits the portion of gains above a standard deduction.

For the 2025 tax year (filed in 2026), the deduction is $278,000. That amount is the same for single filers and joint filers, and married couples filing separately each get the full deduction.³ The deduction adjusts for inflation each year, so expect a slightly higher figure for 2026.

In March 2023, the Washington Supreme Court in Quinn v. State upheld the tax as a lawful excise on the privilege of selling assets rather than a property tax, so the constitutional uniformity rule from Culliton does not reach it.⁴

Who Counts as a Washington Resident

You owe the capital gains tax if you were a Washington resident when you sold the asset. You are a resident if you are domiciled in the state during the tax year. You keep resident status even while spending time elsewhere unless you kept no permanent home in Washington for the entire year and were physically present 30 days or fewer.²

The rule reaches non-domiciliaries too. If you keep a home in Washington and are present more than 183 days during the year, the state treats you as a resident for this tax. When domicile is disputed, the Department of Revenue looks at where you vote, where your driver’s license was issued, where your bank accounts sit, and where your children attend school. If you were a resident at any point during the year, the state presumes you were a resident when any sale that year happened. Spouses are presumed to share a domicile.

What’s Exempt

The list of exempt assets is broader than many people expect. Real estate is fully exempt, including gains on private business interests to the extent they are tied to real property the business owns.⁵ Other exempt categories include:

Retirement accounts, including 401(k), 403(b), 457(b), and traditional and Roth IRAs
Cattle, horses, and breeding livestock, if more than half your gross income comes from farming or ranching
Depreciable business property eligible for depreciation or expensing under federal rules
Timber, timberland, Christmas trees, and short-rotation hardwoods
Commercial fishing privileges
Assets sold under government condemnation or imminent threat of condemnation
Goodwill from the sale of a licensed auto dealership

Deductions and Credits

You can deduct charitable donations to Washington-based organizations, but only after your total giving for the year exceeds $250,000, and the deduction caps at $100,000. The receiving organization must be eligible for tax-deductible contributions under federal law and primarily directed and managed within Washington.⁶ Unused amounts do not carry to another year.

If you paid income or excise tax to another state on the same gain, you can claim a nonrefundable credit equal to the lesser of the Washington tax on those assets or the tax you actually paid elsewhere.² The credit prevents double taxation on gains that two states both claim.

Filing and Deadlines

You file the capital gains return through the Department of Revenue’s My DOR online portal. The state uses your federal Form 1040 and Schedule D as the starting point, so have those in hand before you begin.⁷ You will also need transaction records showing holding periods and cost basis, records of any qualifying charitable donations, and documentation of taxes paid to another state if you are claiming that credit.

For the 2025 tax year, the return and payment are due May 1, 2026, a one-time extension from the usual April 15 deadline.⁸ You can request a filing extension through My DOR by May 1, 2026 that pushes the return deadline to October 15, 2026, but you must have a valid federal extension to qualify. The extension does not move the payment deadline. Your payment is still due May 1.³

Late Penalties

Miss the payment deadline and the penalties climb fast:⁹

Immediately past due: 9% of the unpaid tax
One month past due: 19%
Two months past due: 29%

A separate substantial underpayment penalty starts at 5% if you paid less than 80% of what you owed and the shortfall is at least $1,000. That penalty can rise to 25% if you still don’t pay after the Department sends a notice. Interest also accrues. Requesting a filing extension and paying on time is nearly always better than filing late.

Payroll Deductions You’ll See

Two state programs pull premiums directly from your wages. Neither is an income tax, but both reduce your take-home pay.

Paid Family and Medical Leave

Paid Family and Medical Leave provides paid time off for medical needs, bonding with a new child, and caring for family members. For 2026, the total premium is 1.13% of wages, capped at $184,500 in annual earnings.¹⁰ Employees pay 71.43% of the premium and employers pay 28.57%. A worker earning $75,000 pays roughly $604 for the year. Employers with fewer than 50 employees do not owe the employer portion but still must withhold the employee share.

WA Cares Fund

WA Cares is a state long-term care insurance program. Workers pay 0.58% of gross wages, with no wage cap.¹¹ Employees pay the full premium; employers contribute nothing. Benefits start July 1, 2026 and provide up to $36,500 in lifetime long-term care coverage.¹²

Certain workers are automatically exempt, including federal employees working in Washington, self-employed workers who have not opted in, and temporary workers on non-immigrant visas. Voluntary exemptions exist for people who live outside Washington, spouses of active-duty military members, and veterans with a service-connected disability of 70% or higher.¹²

Other Taxes That Shape Your Bill

The absence of an income tax doesn’t make Washington a low-tax state overall. Two other taxes fill the gap.

The state sales tax rate is 6.5%, and cities and counties add local sales taxes on top.¹³ Combined rates commonly run from about 7.7% in rural areas to 10.5% in parts of the Seattle metro. That is where much of the state’s revenue comes from, and it shows up in your cost of living.

If you own a business, the Business and Occupation tax applies to gross receipts, not profit, so you owe it even in an unprofitable year. Rates for service businesses depend on prior-year gross income: 1.5% under $1 million, 1.75% from $1 million to $4,999,999, and 2.1% at $5 million or more.¹⁴ A small business credit can eliminate the tax entirely if your annual B&O liability falls below $3,840 and you file annually, with the threshold varying by filing frequency and activity.¹⁵

1
vLex United States. Culliton v. Chase
2
Washington State Legislature. Washington Code 82.87 – Capital Gains Tax
3
Washington Department of Revenue. Capital Gains Tax
4
Washington Courts. Quinn v. State, No. 100769-8
5
Washington State Legislature. Washington Code 82.87.050 – Exemptions
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Washington State Legislature. Washington Code 82.87.080 – Deduction for Charitable Donations
7
Washington Department of Revenue. Capital Gains – My DOR Help
8
Washington Department of Revenue. Capital Gains Excise Tax Returns Due Date Moved to May 1, 2026
9
Washington State Legislature. Washington Code 82.32.090 – Late Payment of Tax – Disregard of Written Instructions – Evasion – Penalties
10
Washington State Paid Family and Medical Leave. Updates
11
Washington State Legislature. Washington Code 50B.04.080 – Premium Assessment
12
WA Cares Fund. How the Fund Works
13
Washington Department of Revenue. Local Sales and Use Tax Rate Table
14
Washington Department of Revenue. Business and Occupation Tax Classifications
15
Washington Department of Revenue. Credits