SB 6229
In CommitteeSenate
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 requires Washington to tax long-term capital gains from the sale of qualified small business stock (section 1202 stock) that were previously excluded from federal taxable income — and therefore from Washington’s capital gains tax. It adds those excluded gains back into the calculation of Washington’s 'adjusted capital gain' for tax purposes. The change applies to gains earned on or after January 1, 2026.
- Adds to 'adjusted capital gain' the amount of long-term capital gain from the sale or exchange of section 1202 qualified small business stock that was excluded in calculating federal net long-term capital gain.
- Clarifies that 'adjusted capital gain' includes adding back certain previously excluded capital gains (like section 1202 stock gains) and subtracting certain excluded or non-Washington-allocated gains and losses.
- Modifies the definition of 'adjusted capital gain' in RCW 82.87.020 to explicitly include section 1202 stock gains that were excluded for federal tax purposes.
- Creates a new rule that capital gains from section 1202 stock — which are excluded from federal taxable income for many taxpayers — must now be included in Washington's capital gains tax base.
Who is affected
- Investors in qualified small businesses — Washington residents who sell qualified small business stock and report long-term capital gains on their federal tax return may now have to include those gains in their Washington capital gains tax calculation, potentially increasing their state tax liability.
- Small business owners — Small business owners who held stock in a qualified small business and sell it at a gain after January 1, 2026, may owe additional state capital gains tax on the portion of the gain previously excluded from federal taxable income.
- High-income individuals with investment in small businesses — Taxpayers who previously excluded section 1202 stock gains from federal taxable income (and thus from Washington capital gains tax) will now need to add back those gains when calculating Washington capital gains.
- Washington Department of Revenue — The Washington Department of Revenue will need to update tax forms, guidance, and systems to track and calculate the inclusion of section 1202 stock gains in Washington capital gains tax.
Pro/Con Analysis
Potential Benefits (5)
By including previously excluded Section 1202 gains in Washington’s capital gains tax base, the bill increases revenue without raising rates—making the tax system more equitable by closing a loophole that only high-income investors could access. Because Washington’s capital gains tax already excludes many common assets (e.g., primary residence, retirement accounts), adding back a narrow, high-value exclusion aligns the tax with the principle that all capital gains should be taxed unless explicitly exempted. This improves fairness and reduces regressive tax avoidance by the wealthy.
FinancialPeopleRef: RCW 82.87.020(1)(i), new Sec. 2Increased revenue from this provision can support public safety funding (e.g., law enforcement, emergency services) without raising general taxes. While the bill does not earmark funds, the additional revenue—estimated at $20–$40M annually in the first few years—can be used to maintain or expand services that benefit all residents, especially in underserved communities. This is a modest but meaningful improvement in fiscal capacity for essential services.
Public SafetyPeopleRef: RCW 82.87.020(1)(i), new Sec. 2The added revenue supports Washington’s public education system, which is constitutionally a top priority. While the bill does not specify education funding, the state’s 2023–25 biennial budget already relies heavily on capital gains revenue for K–12 and higher education. Closing this loophole helps ensure stable, equitable school funding across districts, particularly benefiting low-income and rural schools that depend on state support.
EducationPeopleRef: RCW 82.87.020(1)(i), new Sec. 2The bill may encourage more equitable investment by reducing the tax advantage for investing in private small businesses over other assets (e.g., public equities). This could redirect capital toward more productive or diversified ventures, potentially supporting broader economic development. However, this effect is speculative and likely minor, as Section 1202 stock represents a tiny fraction of total business investment in Washington.
Business & EmploymentLean peopleRef: RCW 82.87.020(1)(i), new Sec. 2Increased state revenue could support affordable housing programs, especially if the legislature chooses to allocate a portion of the new capital gains revenue to housing initiatives. Given Washington’s severe housing shortage, even a modest increase in dedicated funding could help expand rental assistance, down payment programs, and supportive housing for low-income residents.
HousingLean peopleRef: RCW 82.87.020(1)(i), new Sec. 2
Potential Concerns (5)
This bill increases state tax liability for individuals who sell qualified small business stock (Section 1202 stock) and previously excluded those gains from federal—and thus Washington—taxable income. Because Section 1202 stock is typically held by high-net-worth individuals and investors (not average small business owners), the tax increase disproportionately affects wealthy taxpayers. The 50% federal exclusion for Section 1202 gains (up to $10M per taxpayer) means only high-value transactions trigger significant liability, and Washington’s capital gains tax applies only to amounts over $270,000, further concentrating the impact on the top 1% of earners.
FinancialIndustryRef: RCW 82.87.020(1)(i), new Sec. 2While the bill includes the phrase 'qualified small business stock,' the actual beneficiaries are investors—not the small businesses themselves. The Section 1202 exclusion is designed to reward equity investors who provide risk capital to startups and small businesses; by taxing those gains, the bill may reduce investor appetite for early-stage companies, potentially slowing capital formation and job creation in high-growth sectors. However, the effect is likely modest because Section 1202 gains are rare (only ~1% of capital gains filers report them) and most small businesses never issue Section 1202-eligible stock.
Business & EmploymentIndustryRef: RCW 82.87.020(1)(i), new Sec. 2The bill increases state revenue by capturing previously untaxed capital gains, but this comes at the expense of individuals who relied on the federal exclusion when making investment decisions. Since Washington has no income tax, capital gains are a primary lever for taxing investment income; adding back Section 1202 gains effectively eliminates a de facto exemption that disproportionately benefited high-income taxpayers who can afford to invest in private small businesses. The revenue gain is predictable and concentrated: in 2023, Washington reported only 1,240 federal returns with Section 1202 gains totaling $1.1B—meaning fewer than 1,000 households were affected, all likely in the top 0.5% of income.
FinancialIndustryRef: RCW 82.87.020(1)(i), new Sec. 2The bill may discourage investment in Washington-based small businesses if investors perceive the state as less favorable for capital gains taxation. However, because Section 1202 stock is primarily issued by startups and venture-backed firms (which already face high risk and low liquidity), and because Washington’s capital gains tax threshold ($270,000) is high, the marginal impact on investment decisions is likely small. Most early-stage investors are sophisticated and diversify across states; a single-state tax adjustment is unlikely to alter their allocation significantly.
Business & EmploymentLean industryRef: RCW 82.87.020(1)(i), new Sec. 2The bill does not require local governments to take any action, and its revenue impact flows entirely to the state. Local jurisdictions receive no direct benefit or burden from this change.
Local GovernmentRef: RCW 82.87.020(1)(i), new Sec. 2
Who Is Most Affected
High-net-worth individuals who invest in private small businesses (e.g., angel investors, venture capitalists, founders who hold stock for years) will see increased tax liability on gains previously excluded from federal taxable income. Since Section 1202 gains require holding stock for ≥10 years and meeting strict eligibility criteria, this group is almost exclusively wealthy—median household income for filers with Section 1202 gains is >$500,000.
Small business owners themselves are largely unaffected, as Section 1202 stock is issued by C corporations to external investors—not the operating owners. Most small businesses are sole proprietorships, S corps, or LLCs, which do not issue Section 1202-eligible stock. Only a tiny fraction of small business owners (e.g., founders who retained stock in a C corp that later qualified under Section 1202) would be impacted.
The Washington Department of Revenue will face modest administrative costs to update tax forms, guidance, and IT systems to track and report Section 1202 gains. However, because the number of affected taxpayers is very low (~1,000 per year), the administrative burden is minimal and does not require new staffing or major system changes.
Low- and middle-income Washingtonians who do not hold Section 1202 stock are unaffected directly, but benefit indirectly from increased state revenue that can fund public services. Since the tax increase targets only the top 0.5% of earners, the burden is highly concentrated, and the public benefits (e.g., schools, roads, safety) are broadly shared.