A bill advancing in the Washington Legislature would tax profits from certain startup stock sales that are currently exempt, drawing sharp warnings from tech leaders who say the change could push entrepreneurs and investors out of the state.
The legislation targets qualified small business stock, a long-standing federal incentive designed to reward founders, early employees, and investors who take risks on startups. Under federal law, gains from these shares are tax-free if held for at least five years, recognizing that most early-stage ventures fail and often require lower pay or personal financial risk.
Washington currently mirrors the federal exemption, but Senate Bill 6229 and House Bill 2292 would reverse course by applying the state’s capital gains tax starting January 1, 2026. For founders who spend years building a company, the shift could translate into significant new tax bills when they finally sell.
Industry leaders argue Washington would be at a competitive disadvantage. Amy Harris of the Washington Technology Industry Association said the proposal “sends exactly the wrong signal,” while Seattle venture capitalist Leslie Feinzaig warned it could deter people from starting companies in the state altogether.
Supporters counter that the exemption overwhelmingly benefits a small group of high earners. Former Facebook executive Brian Boland noted that founders would still receive generous federal tax breaks and argued that entrepreneurs should contribute to public services that support economic growth.
Economists and advisors say the effects may unfold gradually. AngelList researcher Abe Othman warned of a slow erosion of Washington’s startup pipeline over the next decade, while attorney Madhu Singh said the change could make it harder for startups to attract talent willing to gamble on equity. The debate comes as lawmakers confront a projected $2.3 billion budget shortfall and weigh broader tax increases, with public hearings scheduled Tuesday in both legislative chambers.
