Startup leaders within the Seattle area say a brand new proposal to increase the capital beneficial properties tax in Washington state might spur founders and traders to construct firms someplace else.
SB 6229 (and a companion HB 2292) would apply the capital beneficial properties tax to earnings from the sale of certified small enterprise inventory, or QSBS, even when beneficial properties are absolutely exempt beneath federal legislation.
Which means a startup founder or early worker who takes inventory as a substitute of a much bigger wage would owe tax to the state once they finally promote the shares, which generally occurs at acquisition or IPO. Traders who again early-stage startups would face the identical tax.
Relying on the worth of the fairness, the proposal might translate into tens and even lots of of hundreds of {dollars} in taxes per individual.
Hearings: There are public hearings scheduled on Tuesday, Jan. 27 for each payments. The Home Committee on Finance may have a listening to at 8 a.m., whereas the Senate Committee on Methods & Means will meet at 4 p.m. Distant testimony is accessible for each hearings, in addition to written testimony on-line for every invoice.
What would change: QSBS is a long-standing federal incentive designed to reward the chance of beginning and funding younger firms. Founders, early workers, and traders can exclude as much as 100% of eligible beneficial properties from federal capital beneficial properties taxes in the event that they meet strict necessities, together with holding the inventory for at the least 5 years and the corporate assembly federal asset limits on the time the inventory was issued.
Washington’s present capital beneficial properties tax legislation, permitted in 2021, typically follows federal definitions of taxable beneficial properties and didn’t explicitly reject QSBS therapy.
SB 6229 would reverse that strategy. The change would apply to beneficial properties earned on or after Jan. 1, 2026. The proposal wouldn’t have an effect on federal taxes, which might proceed to exempt qualifying beneficial properties beneath Part 1202 of the Inside Income Code.
Response: Amy Harris, director of presidency affairs for the Washington Expertise Trade Affiliation (WTIA), mentioned the proposal “weakens one of many few insurance policies Washington has that truly rewards startup threat.” Harris advised GeekWire it “sends precisely the unsuitable sign, successfully telling homegrown startups to construct in Washington, however plan their success someplace else.”
Seattle-based enterprise capitalist Leslie Feinzaig referred to as the proposal “catastrophic” for entrepreneurs and early workers who make the “terribly irrational, dangerous” option to work at burgeoning startups.
“On an area degree, take away the benefit, and most could be entrepreneurs will both NOT begin new companies, or take their enterprise elsewhere,” Feinzaig wrote on LinkedIn. “And would-be traders will allocate much less to the state.”
Dave Parker, one other longtime Seattle-area investor and advisor, shared the same sentiment, noting in a LinkedIn put up that the legislation would lead to a “expertise drain.”
Counterpoint: However not all traders are voicing disapproval. In a response to Feinzaig’s put up, Brian Boland, a former Fb exec and founding father of Delta Fund, argued that founders and traders would nonetheless obtain a considerable tax benefit in contrast with the usual federal long-term capital beneficial properties fee, which tops out at 20%.
“The invoice strikes from zero tax on beneficial properties which most individuals by no means get to expertise to a smaller tax on beneficial properties,” Boland wrote. He added: “For risk-taking entrepreneurs they take the chance anticipating a bigger upside and the power to construct their very own Enterprise. That shouldn’t excuse them from taking part in taxes that pay for infrastructure that they use to really construct their enterprise. And they’re nonetheless getting an unbelievable tax reduction!”
Sensible affect: Madhu Singh, managing legal professional at Foundry Regulation Group who advises founders and early-stage firms, mentioned the proposal might reshape how startups recruit expertise and negotiate funding phrases.
“If that expertise is aware of they may doubtlessly be taxed and lose out on the total worth of [QSBS], will they commit?” she famous.
Abe Othman, a Seattle-based researcher at startup funding platform AngelList, mentioned the most important threat might not be an instantaneous exodus, however a sluggish erosion of Washington’s startup pipeline.
“You’d nonetheless see profitable startups however they are going to be completely satisfied accidents, and no person will relocate to start out their firm in Seattle,” he mentioned. “These results wouldn’t be apparent for 10–to-15 years, however as soon as they present up, they’ll be sluggish or not possible to reverse.”
A handful of different states — together with California, Pennsylvania, Alabama, and Mississippi — don’t absolutely conform to federal QSBS therapy.
GeekWire contacted Sen. Noel Body, the sponsor of SB 6229, for remark. We’ll replace this story if we hear again. 5 lawmakers are sponsoring HB 2292: Reps. April Berg, My-Linh Thai, Janice Zahn, Davina Duerr, and Kristine Reeves.
Bigger tax panorama: The QSBS proposal is arriving amid broader debates over Washington’s tax construction and income wants. Washington, one of some states with out a private or company earnings tax, is going through a finances shortfall of $2.3 billion within the present working finances that runs by means of 2027, in line with the Washington State Commonplace.
Washington’s 7% tax on capital beneficial properties applies to beneficial properties above $278,000 from the sale of shares and bonds, excluding income from actual property and retirement accounts, amongst different exceptions. Web funds from the tax got here in at $560.6 million in 2024, up from $418.6 million in 2023.
Final yr the state handed a invoice that elevated the capital beneficial properties tax by making a progressive fee construction — 7% on beneficial properties as much as $1 million, and 9.9% on beneficial properties above $1 million. That change was efficient beginning with tax yr 2025.
This yr, lawmakers are anticipated to contemplate a so-called “millionaire’s tax” that might create an earnings tax on Washington state residents incomes greater than $1 million per yr. Income from that tax wouldn’t be generated till 2029.
An evaluation from the Tax Basis concluded that the proposed millionaire’s tax “would make the state more and more undesirable for top earners, significantly within the state’s essential tech sector.”
Washington state has the second-most regressive state and native tax system within the nation, in line with the Institute on Taxation and Financial Coverage.
