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Capital Gains Rules Adopted

July 03, 2024

By Mike Nelson

Update July 10, 2024: The Department of Revenue released a document which highlights their responses to various feedback they received through the entire rulemaking process.

The Washington Department of Revenue (DOR) has adopted rules (WAC 458-20-301 Capital Gains Excise Tax Adoption) to govern the Washington Capital Gain Tax. The rules will take effect on July 28, 2024, and aim to clarify aspects of the tax that has been in effect since 2022. 

The adopted rules are the third draft in a process that began in the summer of 2023. When the rulemaking process started, the WSCPA assembled a team of nearly a dozen CPA members whose clients are subject to the tax to provide feedback to the DOR throughout the process. The feedback we provided on the now-adopted rules can be found in our April 10th letter here

While there have been many changes to the rules since the start of the process, the most significant changes to this most recent draft are the resolution of carryforward losses and the implementation of a two-pronged test for IRC 1256 contracts and similar situations that had federal long-term capital gains without a sale or exchange, as required for the state tax. 

Additional problems and uncertainties remain on several points. Given the initiative on the November ballot, I-2109, which would repeal the capital gains tax, there is unlikely to be any changes to the rules before that election. The DOR may issue guidance on more situations and respond to specific inquiries from taxpayers and their CPAs.  

One of the major outstanding issues concerns penalty waivers. The WSPCA team has been working with DOR on their requested legislation to address the extremely limited penalty waivers. The DOR’s most recent version of the bill in the last legislative session would have provided a penalty waiver once every five years, an improvement from the original one-time waiver. However, we will continue to collaborate with the DOR and the legislature on additional penalty waiver language to grant relief in cases of reasonable cause.  

The WSCPA team will continue to monitor any other rule changes and any related legislation should this tax not be repealed at the November election. 

Mike Nelson is WSCPA Manager of Government Affairs. Contact Mike by email.