Washington State Capital Gains and Estate Tax Changes for 2025: What Founders Need to Know

Posted: October 14, 2025

Washington’s latest round of tax legislation is poised to reshape how startup founders think about exits, liquidity events, and long-term wealth planning.

Earlier this year, lawmakers passed Senate Bill 5813, which introduces a new top rate on capital gains and adjusts the state’s estate-tax thresholds. Both provisions take effect in 2025. These changes have dramatic implications for Washington-based entrepreneurs who hold meaningful equity in private companies.

Capital Gains: New 9.9% Rate Above $1 Million

Washington’s capital gains/excise tax continues to apply at 7 percent to net long-term gains above the inflation-adjusted annual deduction (approximately $250,000 in 2025).

Under SB 5813, an additional 2.9 percent surcharge now applies to gains over $1 million, bringing the total top rate to 9.9 percent.

Retroactive to January 1, 2025
Applies to sales of stocks, business interests, and other long-term investments
Excludes real estate, retirement accounts, and certain timber or livestock sales
Permits up to ~$108,000 in charitable deductions

For founders preparing to sell company stock, through an acquisition, a secondary sale, or another liquidity event, these taxes are material. Planning around timing, charitable contributions, and installment or multi-year sales can help manage exposure and preserve value at exit.

Estate Tax: Higher Exemption, Steeper Top Rates

Effective July 1, 2025, Washington’s estate-tax exemption increases to $3 million, indexed for inflation. At the same time, the top marginal rate climbs to 35 percent for taxable estates exceeding $9 million.

Applies only to decedents dying on or after July 1, 2025
Poses challenges for founders whose wealth is tied up in illiquid company equity
When combined with federal estate taxes, total effective rates may exceed 60 percent

For many entrepreneurs, company stock represents the majority of personal net worth. The revised brackets may create liquidity pressure for estates without prior planning. Updating trusts, family partnerships, or life-insurance structures can prevent heirs or co-founders from being forced to sell equity to cover taxes.

Founder’s Example

Consider a Seattle founder who sells $4 million of company stock in mid-2025:

The first $1 million of gain is taxed at 7 percent.
The remaining $3 million is taxed at 9.9 percent, adding roughly $87,000 in extra state tax.
By spreading the sale across two tax years or contributing shares to a charitable remainder trust, the founder could significantly reduce state-tax exposure while supporting philanthropic goals.
By contributing company interests to an irrevocable non-grantor trust before sale, the founder can eliminate the Washington excise tax while also avoiding federal and state estate taxes on the sale proceeds later upon death.

Proactive planning before signing a term sheet can mean the difference between a smooth liquidity event and an unexpected six-figure liability.

Wealth-Tax Proposal on Hold

Lawmakers also debated but ultimately declined to pass a 0.5 percent annual tax on financial assets exceeding $50 million per individual. While the measure did not advance in 2025, similar proposals are expected to resurface. High-net-worth founders should continue monitoring developments in Olympia.

Key Takeaways for Founders

Plan exits early. The new 9.9 percent rate applies retroactively to 2025 transactions; spreading gains or deferring recognition may help.
Use certain types of trusts. The Washington capital gains/excise tax can be avoided entirely by transferring business interest to certain types of trusts before a sale.
Use charitable tools. Donor-advised funds or charitable remainder trusts can offset large one-time gains.
Revisit estate plans. The $3 million exemption and higher top brackets may warrant updates to trusts, family entities, and insurance.
Coordinate advisors. Align corporate, personal, and estate strategies before signing an LOI or closing a sale.

Frequently Asked Questions

Does the new 9.9 percent rate apply to startup stock sales? Yes. Long-term equity or business-interest sales exceeding $1 million are subject to a higher rate on the portion above that threshold.
Can I avoid the surcharge by relocating before an exit? Washington’s capital-gains tax depends on residency when the gain is realized. Changing domicile can be effective, but only with careful, advance planning.
Are QSBS or Section 1202 exclusions affected? The Washington state capital gains tax starts with net long term capital gain, which means that gains excluded for federal income tax purposes are also excluded for Washington state tax purposes.
What if my company is acquired in a stock-for-stock merger? If the transaction qualifies as a tax-deferred reorganization under federal law, no Washington capital-gains tax is triggered until the new shares are sold.
How should I handle illiquid shares or secondary sales? Consider installment of sales or staged redemptions to spread recognition across years. Work closely with corporate counsel to preserve QSBS eligibility and avoid unintended gain recognition.
Do the estate tax changes help or hurt founders? Both. The higher exemption benefits smaller estates, but higher rates increase exposure for founders whose equity pushes total value beyond $9 million.
Are there any loopholes in the Washington statute to avoid paying the state capitals gains upon sale of a company? Yes. Certain types of irrevocable trusts that own and sell business interests can avoid paying Washington capital gains tax.

Final Thoughts

Washington’s 2025 tax updates bring both challenges and opportunities for founders planning liquidity events or long-term transitions. Coordinating corporate, tax, and estate strategies early can help preserve more of what you’ve built.

If you have questions about how these developments may impact your situation, reach out to Joe Wallin, Startup Group Chair, wallin@carneylaw.com or Matt Wiese, Estate Planning Group Chair, wiese@carneylaw.com, for guidance.

This summary is for informational purposes only and does not constitute legal or tax advice.