Startup leaders in the Seattle region say a new proposal to expand the capital gains tax in Washington state could spur founders and investors to build companies somewhere else.

SB 6229 (and a companion HB 2292) would apply the capital gains tax to profits from the sale of qualified small business stock, or QSBS, even when gains are fully exempt under federal law.

That means a startup founder or early employee who takes stock instead of a bigger salary would owe tax to the state when they ultimately sell the shares, which typically happens at acquisition or IPO. Investors who back early-stage startups would face the same tax.

Depending on the value of the equity, the proposal could translate into tens or even hundreds of thousands of dollars in taxes per person.

Hearings: There are public hearings scheduled on Tuesday, Jan. 27 for both bills. The House Committee on Finance will have a hearing at 8 a.m., while the Senate Committee on Ways & Means will meet at 4 p.m. Remote testimony is available for both hearings, as well as written testimony online for each bill.

What would change: QSBS is a long-standing federal incentive designed to reward the risk of starting and funding young companies. Founders, early employees, and investors can exclude up to 100% of eligible gains from federal capital gains taxes if they meet strict requirements, including holding the stock for at least five years and the company meeting federal asset limits at the time the stock was issued.

Washington’s existing capital gains tax law, approved in 2021, generally follows federal definitions of taxable gains and did not explicitly reject QSBS treatment.

SB 6229 would reverse that approach. The change would apply to gains earned on or after Jan. 1, 2026. The proposal would not affect federal taxes, which would continue to exempt qualifying gains under Section 1202 of the Internal Revenue Code.

Reaction: Amy Harris, director of government affairs for the Washington Technology Industry Association (WTIA), said the proposal “weakens one of the few policies Washington has that actually rewards startup risk.” Harris told GeekWire it “sends exactly the wrong signal, effectively telling homegrown startups to build in Washington, but plan their success somewhere else.”

Seattle-based venture capitalist Leslie Feinzaig called the proposal “catastrophic” for entrepreneurs and early employees who make the “extraordinarily irrational, risky” choice to work at burgeoning startups.

“On a local level, remove the advantage, and most would be entrepreneurs will either NOT start new businesses, or take their business elsewhere,” Feinzaig wrote on LinkedIn. “And would-be investors will allocate less to the state.”

Dave Parker, another longtime Seattle-area investor and advisor, shared a similar sentiment, noting in a LinkedIn post that the law would result in a “talent drain.”

Counterpoint: But not all investors are voicing disapproval. In a response to Feinzaig’s post, Brian Boland, a former Facebook exec and founder of Delta Fund, argued that founders and investors would still receive a substantial tax advantage compared with the standard federal long-term capital gains rate, which tops out at 20%.

“The bill moves from zero tax on gains which most people never get to experience to a smaller tax on gains,” Boland wrote. He added: “For risk-taking entrepreneurs they take the risk expecting a larger upside and the ability to build their own Enterprise. That shouldn’t excuse them from participating in taxes that pay for infrastructure that they use to actually build their business. And they are still getting an incredible tax relief!”

Practical 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.

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 $2.3 billion in the current operating budget that runs through 2027, according to the Washington State Standard.

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 $560.6 million in 2024, up from $418.6 million in 2023.

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 than $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, particularly in the state’s crucial tech sector.”

Washington state has the second-most regressive state and local tax system in the country, according to the Institute on Taxation and Economic Policy.