Selling a Washington Business: How Washington’s Capital Gains Excise Tax and the New “Millionaires’ Tax” Change Deal Structure

Washington business owners considering an exit now face a meaningfully different tax environment than they did even a few years ago. A sale of a Washington‑based business can trigger not only federal tax, but also Washington’s capital gains excise tax and, beginning in 2028 if implemented as enacted, the state’s new “millionaires’ tax.” These regimes do not operate in isolation. Instead, they interact with one another and with federal tax law in ways that directly affect not only the seller’s bottom line, but also how transactions should be structured, negotiated, and documented.

For sellers and their advisors, the practical takeaway is that deal structure and deal documentation increasingly determine after‑tax results in Washington. How a transaction is characterized for tax purposes, when income is recognized, and how purchase price is allocated across different components of the deal can easily change the seller’s Washington tax exposure by seven figures. Prior approaches, developed when only federal income tax was relevant for Washington business owners need to be revisited to determine whether they still produce the best results. What was once a more simple analysis has now become much more complex.

Washington’s capital gains tax is imposed as an excise tax on the sale or exchange of certain long term capital assets owned by individuals. Although often described colloquially as an income tax, it is legally framed as a tax on the transaction itself rather than on income as property, and the Washington Supreme Court upheld that characterization in 2023. The tax applies at a base rate of 7% on “Washington capital gains” above an annual inflation adjusted deduction. Beginning with gains recognized in 2025, Washington added a surtax that effectively increases the marginal rate to 9.9% on the portion of Washington capital gains exceeding $1,000,000.

For many closely held business owners, the threshold issue is whether the sale produces Washington capital gains at all. In an equity sale, stock is treated as intangible personal property, and long term capital gains from the sale are generally allocated to Washington if the seller is domiciled in Washington at the time of sale. As a result, a Washington domiciled seller who sells equity in a business will often face Washington’s capital gains excise tax unless an exemption or deduction applies.

Asset sales are taxed differently. A particular exclusion from the Washington capital gains tax may make an asset sale preferable to a sale of stock for purposes of this tax. Washington’s capital gains tax excludes gains attributable to certain depreciable assets used in a trade or business, and it fully exempts real estate. This means that an asset sale, or a deemed asset sale for federal purposes, may reduce Washington capital gains exposure depending on how value is allocated. However, sellers should be mindful that in a typical asset sale followed by a liquidation of the corporation, shareholders may still recognize long‑term capital gain on the deemed sale of their stock under federal law, and that liquidation‑level gain is generally subject to Washington’s capital gains excise tax if the shareholder is domiciled in Washington. At the same time, those same allocations often convert what would otherwise be capital gain into ordinary income for federal purposes. Washington may not tax the capital gain portion under the capital gains excise tax, but beginning in 2028 it may still reach that ordinary income through the broader millionaires’ tax. This is an area that necessitates a CPA review for the seller when deciding deal structure, as it can have a material impact on how much the seller takes home and how much goes to Uncle Sam.

Layered on top of this existing framework is Washington’s new “millionaires’ tax,” enacted in 2026 and scheduled to take effect on January 1, 2028. This tax applies at a flat 9.9% rate to a household’s “Washington taxable income” above a $1,000,000 standard deduction. Unlike the capital gains excise tax, the millionaires’ tax is not limited to capital gains. Its tax base starts with federal adjusted gross income and then applies Washington specific additions and subtractions, meaning it can reach wages, consulting income, bonuses, non-compete payments, and other ordinary income items that frequently arise in connection with M&A transactions.

Although the millionaires’ tax interacts with the capital gains excise tax through a credit mechanism intended to reduce double taxation, it does not eliminate overlap. In broad terms, capital gains that are subject to Washington’s capital gains excise tax are effectively added back into the millionaires’ tax base, and a credit is then allowed for the excise tax paid. In large exit transactions, this still results in additional Washington tax exposure beyond the 7% or 9.9% capital gains excise tax, particularly in the year of sale when income spikes well above the $1,000,000 threshold.

For example, assume a $50,000,000 all‑cash stock sale of a Washington‑based business by a Washington resident, and assume (for illustration only) that the entire $50,000,000 is long‑term capital gain recognized in the year of closing. Under Washington’s capital gains excise tax, the seller first applies the annual inflation‑adjusted deduction (for reference, the Department of Revenue published a $278,000 deduction for the 2025 tax year, and the actual 2028 amount will be inflation‑adjusted). The remaining Washington taxable capital gain is then subject to 7% on the first $1,000,000 and 9.9% on the excess over $1,000,000 (because the capital gains excise tax is tiered beginning in 2025). Using $278,000 as a stand‑in deduction, the taxable Washington capital gain would be approximately $49,722,000, producing roughly $4,893,478 of Washington capital gains excise tax ($70,000 on the first $1,000,000, plus about $4,823,478 at 9.9% on the balance). Beginning in 2028 (if effective as enacted), the millionaires’ tax would also look to the sale year’s income, applying 9.9% to Washington taxable income above the $1,000,000 household standard deduction, and it is designed to add back Washington capital gains that were subject to the excise tax while allowing a nonrefundable credit for the capital gains excise tax paid on the same income. In a simplified “pure capital gain” stock sale like this, the capital gains excise tax credit may substantially reduce (and in some cases fully offset) the millionaires’ tax attributable to that same gain, but sellers can still face incremental millionaires’ tax in the deal year when other transaction economics create ordinary income (for example, consulting or employment compensation, bonuses, certain non-compete payments, or other items that are not within the capital gains excise tax base and therefore do not generate a matching credit).

This interaction is why business exits are the primary pressure point for the millionaires’ tax. Even owners who will never come close to earning $1,000,000 annually in ordinary operating income can exceed the threshold in a single liquidity year. In the simplified example above, the capital gains excise tax credit may largely offset the millionaires’ tax on that same gain. In many real exits, however, transaction economics often include other sale‑year income (such as consulting or employment compensation, transaction bonuses, certain non-compete payments, or other ordinary income components) that do not generate a capital gains excise tax credit, and those items can create incremental millionaires’ tax exposure even where the capital gains excise tax also applies.

From a deal structuring perspective, the traditional preference of sellers for stock sales over asset sales remains valid, but it is no longer sufficient as a standalone rule of thumb in Washington. Sellers must now model how amounts allocated to purchase price, earn-outs, escrows, rollover equity, employment compensation, consulting arrangements, and non-compete payments will be characterized for both federal and Washington tax purposes. Dollars taxed as ordinary income may avoid the capital gains excise tax but still increase exposure under the millionaires’ tax. Conversely, amounts treated as capital gain may face both federal capital gains tax and Washington’s layered excise and income based regimes.

Timing also matters, but only where federal tax recognition is truly deferred. Sellers often assume that escrows, indemnity holdbacks, or contingent payments will automatically spread income into later years. In reality, many of these mechanisms do not change the year in which gain is recognized for federal tax purposes if the seller is treated as having sold for a fixed purchase price at closing. For Washington purposes, that means income may still be concentrated in a single year, defeating any intended smoothing of income across multiple tax years for purposes of the millionaires’ tax threshold. Installment sale treatment and genuinely contingent consideration can change this result, but only if the deal documents are drafted carefully and consistently with federal tax principles. Truly mitigating Washington tax exposure depends on deal structure (including stock versus asset form and purchase price payment mechanics) and requires a detailed look at the seller’s personal tax situation.

The practical consequences of these rules show up directly in transaction documents. Letters of intent that treat structure and allocation as secondary issues often create downstream problems when sellers discover that the “headline price” does not reflect net after tax proceeds. Purchase agreements that gloss over allocation schedules, characterizations of earn-outs, or post closing service arrangements can inadvertently shift value into categories that are taxed more heavily in Washington. Ancillary agreements, particularly employment, consulting, and non-compete agreements, now deserve heightened scrutiny because they often move value from capital gain into ordinary income that is fully exposed to the millionaires’ tax once effective and can thereby allow the state to double dip.

For Washington business owners and their advisors, the conclusion is straightforward: tax considerations must be integrated earlier into deal planning, and transaction documents must be drafted with Washington’s unique tax regime firmly in mind. What once might have been treated as boilerplate economics or “papering issues” can now materially change a seller’s after tax outcome.

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.