HB 2292
In CommitteeHouse
Small business stock gains
Concerning taxation of a long-term capital gain of a section 1202 small business stock.
This status may be delayed. See Action History below for the latest updates.
How does a bill become law?
- Introduced: The bill is filed and assigned a number.
- Committee: A subject-matter committee holds hearings, takes public testimony, and decides whether to advance the bill.
- Floor Vote: The full chamber (House or Senate) debates and votes on the bill.
- Opposite Chamber: The bill repeats the committee and floor vote process in the other chamber.
- Governor: The Governor reviews the bill and decides whether to sign or veto it.
- Signed: The bill has been signed into law.
AI Analysis
This bill makes Washington state tax the portion of long-term capital gains from qualified small business stock (Section 1202) that was previously excluded for federal tax purposes. It ensures those gains are included in the state’s capital gains tax base starting in 2026, but the federal tax exclusion remains unchanged.
- Adds to the definition of 'adjusted capital gain' any long-term capital gain from the sale of Section 1202 qualified small business stock that was previously excluded when calculating federal net long-term capital gain.
- Ensures Washington includes in its tax base the portion of Section 1202 stock gains that were excluded for federal tax purposes (up to 50% or 100% depending on when the stock was issued).
- Maintains existing federal conformity rules — the federal exclusion still applies for federal tax purposes, but Washington now taxes the full gain (subject to the $26,000 annual exemption).
- Applies only to gains realized on or after January 1, 2026.
Who is affected
- Small business owners and investors who hold qualified small business stock — Individuals who sell qualified small business stock (as defined under federal law Section 1202) and report long-term capital gains from those sales; this bill ensures those gains are included in Washington's capital gains tax base (though the federal exclusion still applies for federal tax purposes).
- High-income Washington residents with significant investment in small businesses — Washington residents who file state income tax returns and have long-term capital gains from qualified small business stock — they may owe additional state tax starting in 2026 if their gains exceed the $26,000 annual exemption.
- Washington Department of Revenue — The Washington Department of Revenue will need to track and verify gains from Section 1202 stock sales and apply the new inclusion rule when calculating state capital gains tax.
Pro/Con Analysis
Stronger case for benefits
Potential Benefits (3)
Generates new state revenue ($33M over two years) that can fund public services (education, healthcare, housing, etc.), benefiting everyday Washingtonians who rely on those services — especially lower- and middle-income households.
FinancialPeopleRef: Fiscal Impact section ($15M FY27, $18M FY28)Promotes tax fairness by closing a loophole that allowed high-net-worth investors in small businesses to exclude substantial gains from state taxation while other capital gains are taxed — aligning state treatment with broader capital gains taxation principles.
Rights & LibertiesPeopleRef: Sec. 1(h), new addition to RCW 82.87.020(1)(i)New revenue supports general fund services, including public safety infrastructure and emergency response — though not directly targeted, the broad-based funding enhancement improves capacity across agencies.
Public SafetyPeopleRef: Fiscal Impact section
Potential Concerns (1)
Increases state tax liability for high-income individuals who sell qualified small business stock (Section 1202), especially those with gains exceeding the $26,000 annual exemption — effectively reversing prior tax policy that excluded these gains from state taxation.
FinancialPeopleRef: Sec. 1(h), new addition to RCW 82.87.020(1)(i)
Who Is Most Affected
High-income individuals (earning >$200K or holding >$1M in assets) who hold Section 1202 stock — they will owe additional state tax on gains exceeding $26K, disproportionately affecting those who invested early in startups or small businesses.
The state gains $33M over two years to fund services used broadly by residents — especially beneficial for low- and middle-income households who rely on public services and are less likely to hold Section 1202 stock.
The Department of Revenue gains authority to track and enforce taxation of previously exempt gains, increasing administrative complexity but also revenue certainty — neutral impact on operations.
Small business owners who held Section 1202 stock and planned to sell after 2026 may face higher state tax than anticipated, potentially altering exit strategies or investment decisions — but most small businesses do not issue or hold such stock, so impact is narrow.
Startups and venture capital firms may see reduced investor demand for Section 1202-eligible stock due to state tax implications, potentially dampening early-stage investment in Washington — though federal exclusion remains, state tax adds a local cost.