Is the Washington capital gains tax deductible on the federal tax return?

[alleychow]

According to Andersen LLC, the WA capital gains tax may be used to offset federal capital gains. Does anyone have information to the contrary?

https://andersen.com/uploads/white-papers/Federal_Tax_Implications_of_Washington_State’s_New_Capital_Gains_Excise_Tax_-_No_Contact.pdf

[Opus 17]

No one here can give tax advice, you would have to hire your own professional.

However, the article does NOT say the taxes are "deductible."  The article says the tax is a reduction in cost basis.

For example, suppose you sell property for $100,000 and pay 7% ($7000) excise tax.  You would report the sale proceeds as $93,000 rather than $100,000 (subtract the taxes from the sales proceeds).  This would reduce your taxable gain (in most cases) but is not the same as a tax deduction.

Timing is also important.  The article explains that if you pre-pay the taxes, you report in the same year.  

For example, you sell for $100,000 in 2024 and pre-pay the excise tax in 2024.  In that case you would report the selling price as $93,000 when you file your 2024 return.

However, if you sold property in 2024 for $100,000 and paid the $7000 excise tax with your state tax return in 2025, then on your 2024 federal return you must report the selling price of $100,000 and pay the appropriate capital gains tax.  Then in 2025, you would take a capital loss for $7000 on your federal return since you can't take an adjustment for the tax until you actually pay the tax.

I'm not taking a position on right or wrong, just explaining in a bit more understandable terms.  

[alleychow]

Thank you very much for your excellent answer, especially the details regarding the timing of filing. So if I pay the WA state capital gains excise tax today through the Washington state portal, am I allowed to make the adjustment on my 2024 federal tax return which I have yet to file?

[Opus 17 · Accepted solution]

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@alleychow wrote:

Thank you very much for your excellent answer, especially the details regarding the timing of filing. So if I pay the WA state capital gains excise tax today through the Washington state portal, am I allowed to make the adjustment on my 2024 federal tax return which I have yet to file?

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Based on the article, no. That's the timing problem the article discusses.   If you pay the excise tax in 2025, you can't use it to adjust the sales proceeds that you received in 2024.  You would report the sale on your 2024 using the full sales proceeds.  Then on your 2025 federal tax return, you can take a capital loss.  Essentially, you would report the sale of the property again, using a purchase price equal to the amount of the excise tax you paid and a selling price of zero, to create the loss. Because capital losses are limited, it may take a few years to realize the full benefit, unless you have other capital gains.

[alleychow]

Thanks!

[American_Coot]

So how do I declare it on my tax return in Turbotax?

[DawnC]

The WA capital gains tax is an excise tax and therefore not deductible.   @American_Coot   The Washington capital gains tax is considered an excise tax and therefore is not deductible on your federal return.   The excise tax cannot be deducted from federal ordinary income because the levy does not fit within any of the types of state or local taxes.   

See WA dept of revenue - 

You can file and pay your capital gains tax at the link above - it is not supported in TurboTax.