Discussion regarding the proposed capital gains tax in Washington requires clarification.
Who knows besides the individual that capital gains were received? The IRS and your state Department of Revenue receive information because the payer reports the transactions and gains on Form 1099-B.
The individual, in turn, then files federal income tax return Form 1040 Schedule D (capital gains and losses). If and when Washington enacts a capital gains tax, the individual will then have the pleasure of satisfying the associated requirement of preparing and filing a state income tax return.
According to the Washington Office of Financial Management, the state would apply a 9 percent tax to capital gains earnings above $25,000 for individuals and $50,000 for joint filers. Residents with no capital gains will not need to file a return. The previous statement is unclear, but it may mean that no capital gains exceeding the minimums cited in the proposal.
Those earnings thresholds, quite high now but if unchanged over time, would ensnare more taxpayers every succeeding year. Also, those thresholds are adjustable and, if deemed appropriate, could be reduced, thereby pulling in more taxpayers. It begins to resemble mission creep toward a state income tax.
