This bill amends existing Washington tax law (RCW 82.87.020) by changing definitions used to calculate the capital gains tax. Specifically, it modifies the definition of "adjusted capital gain" to add long-term capital gain from the sale or exchange of Internal Revenue Code section 1202 qualified small business stock, to the extent that gain or loss was excluded when calculating federal net long-term capital gain. The change is a definitional and tax calculation modification (not a new crime or penalty change). The bill also updates or restates related definitions used in the chapter (for example, capital asset, federal net long-term capital gain, resident, long-term capital gain/loss, and others) and references RCW 82.87.060 and RCW 82.87.100 for further modifications and allocation rules. It applies to capital gains earned on or after January 1, 2026, and uses the Internal Revenue Code of 1986 as amended, as of July 25, 2021, unless "the department" provides a later date by rule; the specific department is not identified in the provided text. The extracted material does not show any changes to penalties or other enforcement procedures. The full texts of the referenced sections RCW 82.87.060 and RCW 82.87.100 are not included here, so details about how the adjusted capital gain flows into "Washington capital gains" and allocation rules are uncertain from the provided facts.

If enacted, people who sell qualified small business stock that was excluded from federal long-term capital gains under IRC section 1202 will likely have to include that excluded amount when calculating their Washington adjusted capital gain, so those sales can increase what is taxed under the state capital gains chapter. This change most directly affects individuals who hold or sell section 1202 qualified small business stock; they may face higher Washington tax bills on transactions that gave them federal exclusions, and the state would likely collect more revenue from those sales beginning for gains earned on or after January 1, 2026. The bill also leaves some practical details open because the full rules that modify adjusted capital gain for Washington and how gains are allocated to Washington (RCW 82.87.060 and RCW 82.87.100) are not included here, and the specific state agency authorized to update the federal code date by rule isn’t named in the provided text.