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Washington state lawmakers consider changes to Qualified Small Business Stock (QSBS) tax exemption, sparking startup concerns
OLYMPIA, Wash. – Washington state lawmakers are considering proposals that could significantly alter the state’s treatment of the federal Qualified Small Business Stock (QSBS) tax exemption, a benefit that allows investors to possibly exclude capital gains from the sale of stock in eligible small businesses.
Senate Bill 6229 (SB 6229) and House Bill 2292 (HB 2292) would require washington residents to pay state taxes on gains from QSBS, effectively decoupling the state from the federal QSBS benefit. Currently, Washington state fully conforms to the federal QSBS rules.
The proposals come as state lawmakers grapple with a budget shortfall and consider new revenue sources.
potential Impact
The potential impact of these changes is causing concern within the Washington state startup community.
“This is a really bad idea,” said Rebecca Lovelace, co-founder and CEO of Seattle-based startup, Starship Technologies. “It will make it harder to attract investment and talent to Washington state.”
impact: Madhu Singh,managing attorney at Foundry Law Group who advises founders and early-stage companies,said the proposal could reshape how startups recruit talent and negotiate investment terms.
“If that talent knows they could potentially be taxed and lose out on the full value of [QSBS], will they commit?” she noted.
Abe othman, a Seattle-based researcher at startup investment platform AngelList, said the biggest risk may not be an immediate exodus, but a slow erosion of Washington’s startup pipeline.
“You’d still see successful startups but they will be happy accidents, and nobody will relocate to start their company in Seattle,” he said. “Those effects wouldn’t be obvious for 10-to-15 years, but once they show up, they’ll be slow or impossible to reverse.”
A handful of other states – including California, Pennsylvania, Alabama, and Mississippi – don’t fully conform to federal QSBS treatment. However, the extent of non-conformity varies significantly between these states.
GeekWire contacted Sen. Noel Frame, the sponsor of SB 6229, for comment. We’ll update this story if we hear back. Five lawmakers are sponsoring HB 2292: Reps. April Berg,my-Linh Thai,Janice Zahn,Davina Duerr,and Kristine Reeves.
Larger tax landscape: the QSBS proposal is arriving amid broader debates over Washington’s tax structure and revenue needs. Washington,one of a few states without a personal or corporate income tax,is facing a budget shortfall of $3.2 billion in the current operating budget that runs through 2027, according to the Washington State Office of Financial management (OFM). This is an increase from the $2.3 billion previously reported.
Washington’s 7% tax on capital gains applies to gains above $278,000 from the sale of stocks and bonds, excluding revenue from real estate and retirement accounts, among other exceptions. Net payments from the tax came in at $568.2 million in 2024, up from $418.6 million in 2023.This figure is slightly updated from the original $560.6 million.
Last year the state passed a bill that increased the capital gains tax by creating a progressive rate structure – 7% on gains up to $1 million, and 9.9% on gains above $1 million. That change was effective starting with tax year 2025.
This year, lawmakers are expected to consider a so-called “millionaire’s tax” that would create an income tax on Washington state residents earning more then $1 million per year. Revenue from that tax would not be generated until 2029.
An analysis from the Tax Foundation concluded that the proposed millionaire’s tax “would make the state increasingly undesirable for high earners, especially in the state’s crucial tech sector.”
Washington state has the second-most regressive state and local tax system