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# Washington’s Capital Gains Tax Proposal: A Threat to the Startup Ecosystem?
- URL: https://venture-block.com/washingtons-capital-gains-tax-proposal-a-threat-to-the-startup-ecosystem/
- Published: 2026-01-28T19:00:51.000Z
- Updated: 2026-10-25T11:14:17.000Z
- Author: Venture Block
- Tags: Policy, Funding

Washington State legislators are facing significant pushback from the technology sector regarding proposed legislation that would expand capital gains taxation to include qualified small business stock. The bills under consideration, SB 6229 and HB 2292, have drawn strong criticism from entrepreneurs, investors, and industry advocates who warn of severe consequences for the state’s startup ecosystem.

Emily Choi-Greene, co-founder and CEO of Seattle-based cybersecurity company Clearly AI, spoke out against the legislation during Tuesday’s public testimony despite typically supporting tax increases. She emphasized that the proposal specifically targets individuals willing to take entrepreneurial risks by starting new companies.

The legislation would extend Washington’s capital gains tax to include profits generated from qualified small business stock sales, even when federal law provides full exemptions for such gains. This change would impose new tax obligations on startup founders, early-stage employees who receive equity compensation, and investors supporting nascent companies. These individuals could face tax bills ranging from tens of thousands to hundreds of thousands of dollars when their companies exit through acquisition or public offering.

Technology leaders throughout the Seattle area have expressed concern that the legislation could drive entrepreneurs and investors to establish their ventures in more favorable tax environments. Amy Harris, representing the Washington Technology Industry Association as director of government affairs, stated during her testimony that founders have mobility and the bills signal that Washington may not be an ideal location for building and hiring.

Choi-Greene detailed her personal circumstances, explaining that she and her husband accepted substantial financial risk and reduced compensation when departing Amazon to launch Clearly AI in 2024\. She described the challenge of operating their startup with limited resources while relying on savings, hoping that QSBS benefits would help fund their children’s education. The company structured equity compensation for early employees with QSBS qualification in mind.

Nicole Doyle, a Seattle entrepreneur who directs the city’s Founder Institute accelerator program, clarified that opposition to the legislation doesn’t reflect unwillingness to support Washington State. She noted that many in the technology community believe in  
contributing their fair share but object to singling out the type of long-term, high-risk equity that federal policy intentionally encourages.

Aviel Ginzburg, a venture capitalist at Founders’ Co-op and leader of startup community Foundations, delivered particularly stark testimony in Olympia, characterizing the proposed legislation as both a job destruction measure and an existential threat to founders and investors in the region. He warned the bills could relegate Seattle to third-tier status among innovation hubs.

Supporting the legislation, Mia Shigemura from the Washington State Budget and Policy Center argued it would help create balance in the state’s tax structure. Washington operates as one of few states without personal income tax, depending instead on sales, property, and various business taxes including the B&O tax. Shigemura cited research suggesting the QSBS exemption primarily benefits extremely wealthy individuals and venture capitalists rather than the small businesses it was designed to support.

Representative April Berg, who chairs the House Finance Committee and co-sponsors HB 2292, defended the proposal as promoting tax fairness and consistency. She characterized the legislation as simply closing a loophole to ensure these gains receive treatment comparable to other long-term capital gains.

When questioned by Representative Cyndy Jacobsen about the possibility of entrepreneurs relocating to states with more favorable tax policies, Berg expressed skepticism that tax considerations drive such decisions, noting that people constantly evaluate whether to stay or leave based on various factors beyond tax code.

Qualified small business stock represents a longstanding federal incentive designed to compensate for the risks associated with launching and financing young companies. Founders, early employees, and investors may exclude up to 100% of eligible gains from federal capital gains taxation by meeting strict criteria, including maintaining stock ownership for at least five years and adhering to federal asset limits at the time of stock issuance.

Washington’s current capital gains tax law, enacted in 2021, doesn’t explicitly address QSBS treatment. Most states follow federal QSBS treatment, with California, Pennsylvania, Alabama, and Mississippi being notable exceptions.

Recent developments include publication of a fiscal note indicating the legislation would generate approximately $1.2 million in additional state revenue for fiscal year 2027, affecting 260 taxpayers. Implementation would cost the state $398,400 in fiscal year 2027\. Public hearing records show over 1,000 people registered opposition to the bills, compared with fewer than 15 supporters.

Washington currently applies a 7% tax on capital gains exceeding $278,000 from stock and bond sales, with exemptions for real estate and retirement accounts. Recent legislation created a progressive structure with 7% taxation on gains up to $1 million and 9.9% on amounts exceeding $1 million. The state currently faces a $2.3 billion budget shortfall in its operating budget extending through 2027.