Washington Crypto Investors: Your Guide to State Taxes on Crypto Gains
Crypto taxpayers in Washington now have to worry about paying a 7% tax on long-term capital gains that exceed $250,000 for the year! Here's an up-to-date summary of what you need to know about the Washington capital gains tax (WA CGT) and how it affects your crypto investments.
Last Updated: May 11, 2023
April 2023 Update
In a landmark decision, the Washington State Supreme Court has upheld the constitutionality of the excise tax on capital gains, ensuring its continued implementation in the state. The ruling, which brings clarity to a highly debated issue, confirms the Department of Revenue's authority to enforce and collect the tax, with the next payment deadline set for April 18, 2023.
This judgment comes as a relief for proponents of the tax, who have argued it's a critical tool for addressing income inequality and funding public programs. Detractors, on the other hand, have expressed disappointment, citing concerns about potential negative effects on investment and job creation.
Moving forward, taxpayers in Washington State should prepare for the upcoming deadline, as the Department of Revenue will proceed with collection efforts as planned.
Washington's Capital Gains Tax: Background
As a crypto investor in Washington, you may be aware that the state has implemented a capital gains tax on long-term capital assets, including cryptocurrencies held for more than a year. The tax rate is currently 7% on gains exceeding $250,000. While the constitutionality of this tax had been challenged in Court, the recent decision by the Washington State Supreme Court clarifies that the tax is constitutional and valid.
What does this mean for crypto investors in Washington?
If your long-term capital gains (for all assets, not just crypto) exceed the $250,000 threshold for the taxable year, you should file and pay Washington capital gains tax. The online system is available to report and pay the tax.
Capital Gains Tax in Washington Explained
The capital gains tax in Washington applies to the sale or exchange of long-term capital assets, including cryptocurrencies held for more than a year. The tax rate is currently 7% on long-term capital gains exceeding $250,000 per tax filing (regardless of filing status). This means that if you sell or exchange your cryptocurrencies and your total long-term capital gains (from all assets, not only crypto) are over $250,000 for the year of 2022, you'll owe taxes on the excess of your long-term gains over this threshold. Please note that there are some sales that are exempt from this tax, such as sales of real estate among others.
What to Do for Tax Year 2022?
Crypto investors with a capital gains tax liability in Washington should proceed to file a Washington capital gains tax return and pay the tax. It's important to note that if you owe capital gains tax in Washington, you must file a return and submit your payment by the April 18, 2023 deadline. If you extend your federal income tax return, you may request to extend your Washington Capital Gains Tax Return by submitting a request to extend electronically at My DOR. Please remember that an extension of time to file does not extend your time to pay the tax due, and you should make a payment. Failure to do so could result in interest and penalties being added to your tax bill.
The Department has put out a list of frequently asked questions on their capital gains tax. In case there was any doubt as to the applicability of this tax to cryptocurrency, they specifically answer that “You will generally owe Washington’s capital gains tax on a sale of cryptocurrency if you hold it for more than one year and you are domiciled in Washington at the time the sale or exchange occurs. Cryptocurrency is considered intangible property for purposes of the capital gains tax.”
As such, if your long-term gains are over the filing threshold, you should make sure to file your Washington capital gains tax return starting for tax year 2022.
How to File Your Taxes as a Crypto Investor in Washington?
The good news is that once you have calculated your overall crypto taxes with Accointing for your federal Form 1040, filing your Washington Capital Gains Tax Return will just require you to have your federal tax return on hand. The state has provided a guide to assist you in completing your tax return.
It's crucial to keep accurate records of your crypto transactions, including the date of acquisition, the date of sale, and the cost basis. Failure to do so could result in underreporting your capital gains and potential penalties. Fortunately, once you have connected all your wallets and exchanges with Accointing, your tax reports will keep all this information. Make sure to maintain all these files indefinitely in case of an audit.
Unfortunately for investors with long-term gains exceeding $250,000 per year, they will now have to consider an additional 7% of this going to the state of Washington. The good thing is that with proper tax planning, investors can actively manage their taxable gains to stay under this threshold. With Accointing’s Tax Loss Harvesting tool, you can ensure to keep your gains under that critical threshold by selling your tax positions that can help you reduce your long-term capital gains. Don’t sell $500k of Bitcoin in one year and $0 in the second year, instead, split that sale into two to avoid this tax, or harvest some long-term tax losses. By connecting your data to Accointing, you can make sure to always maximize your after-tax profits.
The information contained in this article, including any supplemental materials, is for general information purposes and does not constitute financial, investment, legal, or tax advice. The present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.