Washington Tax Changes for Founders: What to Know About the New Income Tax, Capital Gains, and QSBS

By Joe Wallin and Matt Wiese

Posted March 27, 2026; Updated: March 30, 2026  

Washington’s tax structure has changed significantly over the last two legislative sessions. In 2025, Senate Bill 5813 introduced a tiered capital gains tax and raised estate tax rates. The 2026 session brought another round of changes: the legislature passed a new 9.9% income tax on high earners (ESSB 6346), which Governor Ferguson signed into law on March 30, 2026; reversed the estate tax rate increases it enacted just a year earlier (SB 6347); and defeated a bill that would have taxed QSBS gains (SB 6229). Together, these developments directly impact Washington-based entrepreneurs who hold meaningful equity in private companies. 

Capital Gains Tax: Tiered Rates Remain in Effect 

Washington’s capital gains excise tax, first enacted in 2021 and upheld by the state Supreme Court in 2023, continues to apply. Under SB 5813, which took effect retroactively to January 1, 2025, the tax uses a two-tier rate structure: 

• 7% on net long-term capital gains above the annual deduction (approximately $262,000 in 2025, adjusted for inflation) 

• 9.9% on net long-term capital gains above $1 million 

Key features of the capital gains tax remain unchanged: 

• 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 approximately $108,000 in charitable deductions 

• Under current law, QSBS gains excluded under IRC Section 1202 remain excluded from the Washington tax base (see below) 

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

QSBS: Exclusion Survives Legislative Challenge 

In the 2026 session, Senate Bill 6229 (and companion House Bill 2292) would have required taxpayers to add back federally excluded QSBS gains when calculating Washington’s capital gains tax. The bill did not pass. The legislative deadline came and went without SB 6229 advancing. 

As a result, under current law, gains excluded under IRC Section 1202 continue to be excluded from Washington’s capital gains tax. Because the state tax generally tracks federal net long-term capital gain and excluded gains are not included in that federal figure, gains qualifying for the QSBS exclusion do not enter Washington’s tax base. This remains a significant planning advantage for founders of C corporations that meet the qualified small business stock requirements.  

New Income Tax: 9.9% Tax on Washington Taxable Income Above $1 Million (ESSB 6346) Signed Into Law

The most significant development of the 2026 session is Engrossed Substitute Senate Bill 6346, which introduces Washington’s first broad-based income tax in nearly a century. Governor Ferguson signed the bill into law on March 30, 2026, at a ceremony in the State Reception Room in Olympia. The bill passed the Senate 27–22 on February 16 and the House 51–46 on March 10 after a nearly 25-hour marathon floor debate, the longest in Washington legislative history. 

Key provisions: 

• Tax rate: 9.9% on Washington taxable income above $1 million per taxpayer (with a single $1 million deduction for married couples filing jointly) 

• Standard deduction: $1 million, shared between married couples and domestic partners filing jointly (i.e., a married couple does not receive $2 million). Indexed for inflation beginning in 2030, the deduction functions as a threshold; only income above $1 million is taxed, not a cliff. 

• Effective date: January 1, 2028, with first returns due in 2029. 

• Income base: Starts with federal adjusted gross income (AGI) with modifications. Excludes long-term capital gains already subject to Washington’s capital gains tax, but includes wages, bonuses, business income, partnership and S-corp distributions, rental income, and investment income. 

• Charitable deduction: Capped at $100,000 per individual (not indexed for inflation). 

• Credits: Credit for Washington capital gains tax paid (preventing double taxation on the same gains); credit for B&O taxes paid; credit for income taxes paid to other states on the same income. 

• Pass-through entity tax (PTET) election: Available for owners of partnerships, LLCs, and S-corps, which may provide federal deductibility benefits subject to IRS SALT cap workaround rules 

• Initiative 2111 amendment: The legislature amended the 2024 statutory ban on income taxes (I-2111, sponsored by Let’s Go Washington) to create an exception for the tax on household income above $1 million 

Interaction with Capital Gains Tax 

The income tax provides a credit for Washington capital gains taxes already paid, so founders will not be doubly taxed on long-term gains. However, other income, including wages, bonuses, short-term gains, and business income, will now be subject to the 9.9% rate above $1 million. 

The Tax Foundation has calculated that stacking ESSB 6346 on top of existing payroll taxes produces a combined state and local marginal rate of approximately 18% on wage income and RSU vesting above the threshold (9.9% from ESSB 6346, plus the WA Cares long-term care payroll tax, Seattle’s JumpStart Payroll Expense Tax, and the Social Housing Tax). 

Constitutional Questions and Legal Challenges 

Legal challenges have already been announced. The Citizen Action Defense Fund (CADF), an Olympia-based nonprofit focused on constitutional litigation, has retained former Washington Attorney General Rob McKenna to lead a constitutional challenge against ESSB 6346.

Washington’s constitution has historically been interpreted to require uniform taxation and a maximum 1% rate on property, which courts have held includes income since 1933. The state Supreme Court would need to either distinguish this tax from prior precedent or overturn nearly a century of case law. The legislation is also likely to prompt renewed judicial review of the state’s historical treatment of income taxes. 

Separately, the legislature included a “necessity clause” in the bill, which prevents a veto referendum. Brian Heywood’s Let’s Go Washington committee has announced it will pursue an initiative to the people to repeal the tax, which requires approximately 340,000 valid signatures by early July 2026 to qualify for the November ballot. 

Founders should plan for the tax to take effect as scheduled in 2028 while monitoring ongoing legal developments.  

Incomplete Non-Grantor (ING) Trusts 

The statute is intended to prevent avoidance through incomplete non-grantor trust structures by adding back income attributable to such trusts. Founders considering trust-based strategies should work closely with counsel to evaluate which structures remain effective under the new law. 

Estate Tax: Rate Increases Reversed (SB 6347) 

In a notable reversal, the legislature passed Senate Bill 6347, which Governor Ferguson signed on March 25, 2026. This bill undoes the estate tax rate increases enacted under SB 5813 just one year earlier. 

Effective July 1, 2026: 

• Top marginal rate reverts from 35% to 20%. 

• Rate structure returns to the pre-SB 5813 range of 10% to 20%, depending on the value of the taxable estate. 

• The $3 million per-individual exemption is maintained. 

• However, the inflation-indexing mechanism from SB 5813 may effectively revert to a reference that no longer exists, which could mean the exemption is frozen at $3 million with no future adjustments. This creates uncertainty as to whether the exemption will increase over time. 

For decedents dying between January 1 and June 30, 2026, the exemption amount is $3,076,000 (as adjusted under SB 5813). For decedents dying on or after July 1, 2026, the exemption is $3 million under the new law. 

Potential Municipal Income Tax Authority 

The 2026 legislation contemplates potential local income tax authority for cities, counties, and municipalities, subject to a mandatory $1 million standard deduction. The scope of this authority, if upheld and implemented, and its interaction with existing constitutional constraints on local taxing power remain to be tested. Founders should monitor whether major cities like Seattle move to adopt local income taxes, which could add to the overall tax burden. 

Wealth Tax Proposal: Still on Hold 

For the second consecutive year, lawmakers debated but declined to pass a wealth tax on financial assets exceeding $50 million per individual (SB 5797 in 2026). While the measure did not advance, similar proposals are expected to resurface. High-net-worth founders should continue monitoring developments. 

Founder’s Example 

Consider a Seattle founder who sells $4 million of company stock in mid-2028 (after the income tax takes effect). Assume the stock does not qualify for the QSBS exclusion under Section 1202: 

• Capital gains tax: The first ~$262,000 is exempt. Gains from ~$262,000 to $1 million are taxed at 7% (i.e., 7% on ~$738,000, or approximately $51,660). Gains above $1 million are taxed at 9.9% (i.e., 9.9% on ~$3 million, or approximately $297,000). Total state capital gains tax: approximately $348,660. 

• Income tax: A credit is provided for capital gains taxes paid, so the founder is not double-taxed on the long-term gain. However, if the founder also has $500,000 in W-2 income, that income pushes the founder closer to or over the $1 million threshold for the income tax. 

• Estate planning: If the founder dies after July 1, 2026, the estate benefits from the lower 20% top rate rather than the 35% rate that was briefly in effect. 

If the stock qualified for the QSBS exclusion, the result would be dramatically different as the excluded gain would not enter Washington’s capital gains tax base, potentially reducing the state tax to zero on the qualifying portion. 

By spreading the sale across two tax years, contributing shares to a charitable remainder trust, or transferring company interests to an irrevocable non-grantor trust before sale, the founder could significantly reduce state tax exposure. Depending on structure and sourcing rules, an irrevocable non-grantor trust may reduce or eliminate the Washington capital gains excise tax while also helping to avoid federal and state estate taxes on the sale proceeds upon death. 

Key Takeaways for Founders 

• Plan exits early. The 9.9% capital gains rate applies to gains above $1 million. Beginning in 2028, the new income tax adds another layer at 9.9% on non-capital-gains income above $1 million. The Tax Foundation estimates a combined state and local marginal rate exceeding 18% for Seattle-based high earners. 

• Protect QSBS eligibility. The Section 1202 exclusion remains available in Washington but faced a legislative challenge in 2026 and may face future ones. Preserving QSBS status is important. 

• Use certain types of trusts. Depending on structure and sourcing rules, the Washington capital gains excise tax may be reduced or eliminated by transferring business interests to certain types of irrevocable trusts before a sale. However, the new income tax is intended to limit or prevent the use of incomplete non-grantor trusts for avoidance. 

• Use charitable strategies. Donor-advised funds or charitable remainder trusts can offset large one-time gains, though the income tax caps charitable deductions at $100,000. 

• Revisit estate plans. The reversal to a 20% top rate and the $3 million exemption may warrant updates to trusts, family entities, and insurance structures. 

• Consider timing. Accelerating income into 2026 – 2027 (before the income tax takes effect) may be advantageous for certain transactions.  

• Coordinate advisors. Align corporate, personal, and estate strategies before signing an LOI or closing a sale. 

Frequently Asked Questions 

• Does the new 9.9% capital gains rate still apply to startup stock sales? Yes. Long-term equity or business-interest sales exceeding $1 million remain subject to the 9.9% rate on the portion above that threshold. The capital gains tax rates from SB 5813 were not changed in the 2026 session. 
• What about the new income tax? Does it apply to my stock sale? The income tax (ESSB 6346) provides a credit for capital gains taxes paid, so long-term gains already taxed under Washington’s capital gains excise tax are not double-taxed. However, other income (wages, bonuses, business income) is subject to the 9.9% income tax above $1 million beginning in 2028. The income tax also provides credits for B&O taxes paid and income taxes paid to other states on the same income. 
• Are QSBS or Section 1202 exclusions still available? Yes, under current law. SB 6229, which would have taxed QSBS gains, did not pass. Washington’s capital gains tax generally tracks federal net long-term capital gain, and because excluded gains are not included in that federal figure, gains qualifying for the Section 1202 exclusion remain outside Washington’s tax base. 
• Can I change my tax exposure by relocating before an exit? Washington’s capital gains tax depends on residency when the gain is realized. Changing domicile can be effective but requires careful, advance planning, including severing substantive ties with Washington and limiting time spent in the state. Day-count is only one factor; the analysis is holistic, and half-measures typically fail. 
• Does the new income tax apply to nonresidents? ESSB 6346 applies to nonresidents only on Washington-source income, including wages earned in Washington, income from businesses operating in the state, and gains from Washington real property. A nonresident founder whose only Washington connection is holding stock in a Delaware C corporation generally would not owe the income tax on a sale of that stock under current sourcing rules, though those rules can be complex and fact-specific. 
• 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 sales or staged redemptions to spread recognition across years. Work closely with corporate counsel to preserve QSBS eligibility and avoid unintended gain recognition. 
• Did the estate tax changes help or hurt founders? The 2026 reversal helps. The top rate dropped from 35% back to 20%, reducing exposure for larger estates. The $3 million exemption remains, though inflation indexing may effectively be frozen. Combined with federal estate taxes, careful planning is still essential for founders whose equity pushes estate values above $9 million. 
• Are there any structures to avoid paying the Washington capital gains tax upon sale of a company? Depending on structure and sourcing rules, certain types of irrevocable non-grantor trusts that own and sell business interests may reduce or eliminate Washington capital gains tax. However, the new income tax (ESSB 6346) is intended to prevent avoidance through incomplete non-grantor trusts, so the choice of trust structure matters. Work closely with counsel to evaluate options. 
• Will the income tax survive legal challenges? That remains to be seen. The Citizen Action Defense Fund has already retained former Attorney General Rob McKenna to lead a constitutional challenge, and a lawsuit is expected within days of the signing. Separately, Let’s Go Washington is pursuing an initiative to the people to repeal the law, which would require approximately 340,000 signatures by early July 2026. The bill’s “necessity clause” blocks the faster veto referendum pathway. Founders should plan as if the tax will take effect in 2028 while monitoring both the litigation and the repeal effort. 
• Can voters repeal the income tax by referendum? Not through a veto referendum. The legislature included a “necessity clause” in ESSB 6346, which exempts the bill from the referendum power. However, citizens can file an initiative to the people, which requires collecting approximately 340,000 valid signatures by early July 2026. Let’s Go Washington has announced it will pursue this path. If the signatures are collected and validated, the repeal measure would go before voters in November 2026. 

For a deeper dive on the Millionaires’ Tax, Capital Gains, and QSBS, visit The Startup Law Blog, written by the co-author of this article, Joe Wallin.

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.