The bill amends RCW 82.87.020 and adds a new section to the chapter governing the Washington capital gains tax. It changes the statutory definition of "adjusted capital gain" to explicitly add the amount of long-term capital gain from the sale or exchange of internal revenue code section 1202 qualified small business stock, but only to the extent that such gain or loss was excluded in calculating federal net long-term capital gain. The amended definition continues to specify multiple technical add‑backs and subtractions (including certain long‑term capital losses and carryovers, adjustments for section 1256 contracts, and exclusions or non‑allocations to Washington) and preserves related definitions such as "capital asset," "long‑term capital gain/loss," "resident," and others used to determine Washington capital gains. The act applies to capital gains earned on or after January 1, 2026. The Internal Revenue Code reference point for related terms is as of July 25, 2021, unless the department adopts a later date by rule. The amendment is a change to tax law definitions and thus alters the tax base calculation for individuals subject to this chapter; it does not create a new crime or change criminal penalties. The bill text provided does not identify the department referenced, does not include the full texts of RCW 82.87.060 or 82.87.100 (which are referenced for allocation and computation), and does not include any tax rates, filing procedures, or other operational provisions beyond the definition change.

If enacted, starting January 1, 2026 Washington will count gains from the sale of qualified small business stock that were excluded for federal tax under IRC section 1202 when calculating an individual's Washington "adjusted capital gain." That means people who sell qualified small business stock and took the federal exclusion will likely see a larger Washington capital gains tax base and, as a result, higher state tax liability or reduced after‑tax proceeds than they would under current state treatment. The change most directly affects individuals (residents and others who must allocate gains to Washington) who hold or dispose of IRC §1202 qualified small business stock; they face higher potential tax costs and slightly different compliance considerations. The overall revenue effect and how much any given taxpayer’s liability changes depend on other provisions not included here (for example RCW 82.87.060 and 82.87.100), the department referenced, and the tax rates or allocation rules, which are not provided in the extracted facts.