Disputing a Washington Capital Gains Tax Assessment

Washington imposes an excise tax on the sale or exchange of certain long-term capital assets, including assets such as stocks, bonds, and business interests, when the taxable gain exceeds the annual deduction amount. Most filings are routine, but a Washington Capital Gains Tax Assessment can become contested when DOR's view of the transaction does not match the taxpayer's return.

A dispute usually starts when the Department of Revenue calculates the gain differently than the taxpayer did, denies an exemption or deduction that was claimed, or treats a return as missing or incomplete.

At Lana Kurilova Rich, PLLC, capital gains tax disputes typically turn on the facts behind a single transaction: what was sold, what it cost, what exemption or deduction applies, and whether Washington DOR calculated the tax correctly on those facts.

What Is the Washington Capital Gains Tax?

The tax applies to long-term capital gains of Washington residents above an annually adjusted standard deduction. It can also apply to certain gains of nonresidents when the gain is connected to Washington. The tax was enacted in 2021 through ESSB 5096, codified at RCW 82.87, and first applied to gains recognized in 2022.

In 2023 the Washington Supreme Court held, 7-2, that the tax is an excise tax on the sale or exchange of a capital asset, not a tax on income or property, so it is not subject to the state constitution's uniformity requirement for property taxes. The U.S. Supreme Court declined to review that decision. The tax's basic constitutional validity is therefore settled; a live dispute today is almost always about how the tax applies to a specific transaction, not about whether the tax itself is lawful.

How the Rate and Standard Deduction Work

For the 2025 tax year, an individual, or a married couple or domestic partnership filing together, may deduct the first $278,000 of long-term capital gain. That amount is adjusted for inflation each year from a statutory base of $250,000.

Above the deduction, gain is taxed at 7% up to $1,000,000, and at a combined 9.9% on the portion above $1,000,000. Because the deduction is re-indexed annually, the current year's exact figure should be confirmed with DOR before relying on it.

What Gains Are Exempt or Deductible?

Some categories are excluded from the Washington capital gains tax, while others may be deducted from an otherwise taxable gain:

• Sales of real estate are not subject to the tax, regardless of how long the property was held.
• Distributions from retirement accounts, including 401(k)s and IRAs, are exempt.
• A qualifying sale of an interest in a family-owned small business, as defined by statute, is deductible.
• Charitable donations to a Washington-based qualified organization are deductible up to $111,000 per year, but only the portion of total annual donations above $250,000 qualifies.

Whether a specific sale fits one of these categories, and how it should be documented, is frequently where a dispute begins.

Filing the Washington Capital Gains Tax Return

A capital gains tax return is generally due April 15 of the year after the gain was recognized, filed electronically through DOR's My DOR portal along with a copy of the taxpayer's federal return. A filing extension may be requested through My DOR by the original due date, but only if the taxpayer also received a federal filing extension; a filing extension does not extend the deadline to pay.

Filing the return is also the method for claiming an overpayment. To seek a refund, the taxpayer files the capital gains tax return and provides the supporting federal return.

How an Incorrect Assessment Happens

An incorrect assessment can arise from several different points in the transaction and filing process.

First, DOR may disagree with the exemption or deduction claimed. For example, the taxpayer may have treated a sale as exempt real estate, a retirement distribution, a qualifying family-owned small business sale, or a charitable deduction, while DOR concludes that the facts do not support that treatment.

Second, DOR may recalculate the gain itself. A disagreement over the cost basis, the holding period, or how proceeds from a multi-asset sale should be allocated can change the taxable gain even when both sides agree on what was sold.

Third, DOR may treat a return as missing or issue a substitute assessment. If DOR records show a triggering sale but no return was filed, or if a filed return appears incomplete, DOR may assess tax using the information available to it, which can overstate the actual taxable gain.

Finally, an audit can change how the transaction is characterized. A DOR examination of brokerage records, closing statements, or business records can raise questions about basis, holding period, allocation, or whether the asset falls inside or outside a statutory exemption or deduction.

Disputing an Assessment: The DOR Review Process

Washington's standard excise-tax review process applies to capital gains assessments. Before filing a formal request, a taxpayer is generally encouraged to first ask for a meeting with the supervisor of the DOR employee who issued the assessment or denied the refund.

A formal request for review is decided by a Tax Review Officer in DOR's Administrative Review and Hearings Division. The Tax Review Officer is an attorney who conducts an informal hearing, either in person or by telephone, and issues DOR's final internal decision. That request must generally be filed within 30 days of DOR's action, or by the due date of a disputed bill or assessment, whichever applies.

After DOR's internal decision, a taxpayer who remains dissatisfied has further procedural options. The taxpayer may appeal to the Washington State Board of Tax Appeals under RCW 82.32.160, or the taxpayer may pay the assessed amount in full and file a refund suit in Thurston County Superior Court under RCW 82.32.180. The Board of Tax Appeals route does not require full payment before filing, while the Thurston County Superior Court route does. Each path has its own deadline running from DOR's decision, so the applicable deadline should be confirmed before the internal review window closes.

What Should You Do First If You Are Disputing a Washington Capital Gains Tax Notice or Assessment?

1. Identify exactly what DOR is proposing or has assessed, and why.
2. Determine whether the deadline to request a review is still open.
3. Gather records supporting the reported gain, basis, and any exemption or deduction claimed.
4. Compare DOR's calculation to the applicable statute and to your own computation.
5. Decide whether to request an informal review, and prepare that request before the deadline.
6. Address any resulting penalty or interest separately from the underlying dispute over the gain itself.

A Washington Capital Gains Tax Dispute Should Be Resolved From the Transaction Outward

The tax applies to a specific sale, not to a taxpayer's finances generally, so the strongest response to an assessment starts with the transaction itself: what was sold, what it cost, and what the statute says about it.

Lana Kurilova Rich, PLLC represents Washington sellers and business owners in capital gains tax assessments, exemption and deduction disputes, and related Washington state tax matters, combining legal representation with in-house accounting support so the underlying transaction records and the tax-law dispute can be addressed together.

The firm is based in Bellevue and represents individuals and businesses throughout Washington. If DOR has assessed capital gains tax you believe is incorrect, or denied a refund or exemption, the first step is identifying exactly what DOR calculated, what the statute allows, and how much time remains to request a review.