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Washington Capital Gains Tax on a Business Sale

By the Seattle Business Brokers Desk · Updated October 16, 2026

Washington has no personal income tax on wages, but it does tax large capital gains. For many owners, a company sale is the largest gain they will ever report.

Seattle Business Brokers Desk explains how the tax works and the deduction that often removes it.

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The short answer

  • Washington taxes long term capital gains at 7% above the standard deduction and 9.9% on gains over $1 million
  • The standard deduction was $278,000 for 2025 and is adjusted for inflation each year
  • Gain from selling substantially all of a qualified family owned small business can be deducted in full
  • You need five years of ownership, material participation in five of the last ten years, and revenue under the cap
  • Real estate is excluded from this tax, but other Washington taxes may apply to it
In this guide
  1. What the Tax Covers
  2. The Rates
  3. The Family Owned Small Business Deduction
  4. Where Owners Trip Up
  5. Timing and Filing
  6. How It Interacts With the Rest of the Deal
  7. Before You Sign a Letter of Intent

What the Tax Covers

Washington's capital gains tax applies to individuals with long term capital gains from selling assets such as stock, bonds, and interests in a business. Gains on real estate are excluded.

When you sell your company, a large long term gain can fall under this tax. How much of it counts depends on whether you sell shares or assets and how the price is allocated, which your CPA will work through.

The Rates

For 2025 and later, the tax is 7% on long term gains above the standard deduction, and 9.9% on the part above $1 million. The higher tier came from a 2.9% surcharge added in 2025.

The standard deduction was $278,000 for 2025 and is indexed for inflation each year. The $1 million tier is not indexed, so for 2025 the 9.9% rate started on gains above about $1,278,000.

Check the Department of Revenue's current figures for the year you sell, since they change.

The Family Owned Small Business Deduction

The law includes a deduction aimed squarely at owners selling their company. It can remove the gain from the sale of a qualified family owned small business entirely. There is no dollar cap on the deduction itself.

To qualify, the sale has to meet several tests.

  • Substantially all. You sell at least 90% of the fair market value of the business's assets, or substantially all of your interest in it.
  • Holding period. You held a qualifying interest for at least five years right before the sale.
  • Material participation. You or your family materially participated in the business for at least five of the ten years before the sale. That test doesn't apply to a sale to a family member.
  • Size. Worldwide gross revenue in the 12 months before the sale was at or below the cap. The law set it at $10 million and indexes it for inflation, so check the current figure.

The law also has ownership rules about how much of the business you and your family must own. Your CPA will check those against your structure.

Where Owners Trip Up

The deduction is generous, but the tests are strict. Small details in timing and structure decide it.

  • Selling only part of the company, so the "substantially all" test fails
  • A recent reorganization that a CPA must confirm didn't reset the holding period
  • Revenue that grew above the cap in the last 12 months before closing
  • An owner who stepped back years ago and no longer meets the participation test

Material participation follows the federal passive activity rules. Regular, continuous and substantial involvement is the standard.

Timing and Filing

The Washington capital gains tax return is due with your federal individual return, generally in April of the year after the sale. You claim the deduction on that return.

If you expect a large gain that won't qualify for the deduction, plan for the payment. Earnouts and seller financing can spread gain across years, which may change how much falls in the 9.9% tier.

How It Interacts With the Rest of the Deal

The allocation of the price affects federal tax, state capital gains and Washington sales tax all at once. Our guide to sales tax on equipment covers that side.

If your company owns real estate, that part of the gain is outside this tax, but selling the company that owns it may trigger real estate excise tax. See REET on a controlling interest sale.

Before You Sign a Letter of Intent

  1. Ask your CPA whether you meet each test for the family owned business deduction.
  2. Check your revenue over the most recent 12 months against the current cap.
  3. Decide whether an asset sale or a stock sale best fits the deduction and your buyer.
  4. Estimate your after tax proceeds for each offer you receive, not just the price.

This is general information, not tax advice. To learn what your company might sell for, start with the price check form or call (206) 555-0171.

Call (206) 555-0171