Key Points

• Washington’s capital gains tax allows a charitable deduction, but only for donations to organizations that are both federally eligible and primarily directed and managed within Washington, creating a stricter standard than federal law and limiting who qualifies.
• Contributions of appreciated stock to donor advised funds are not taxable events, but the expected deduction against Washington capital gains can be lost if the DAF sponsor is based outside Washington, even if the funds ultimately support in-state charities.
• The deduction is tightly constrained (only amounts over $250,000 qualify, capped at $100,000 per return, with no carryforward), so taxpayers using DAFs need to pay close attention to sponsor location or risk forfeiting a key state tax benefit.

Overview

Washington residents who realize long-term capital gains and contribute appreciated stock to a donor advised fund (DAF) face a significant and often unexpected tax consequence. Even though the contribution itself is not taxable, the charitable donation deduction against Washington capital gains may be denied if the DAF's sponsoring organization is not "principally directed and managed" within the state of Washington.

In this alert, we explain the issue and offer practical guidance for affected taxpayers.

Background: Washington's Capital Gains Excise Tax

Washington imposes a capital gains excise tax on the sale or exchange of long-term capital assets under Chapter 82.87 RCW. The tax is calculated by multiplying a taxpayer's "Washington capital gains" by 7 percent. An additional excise tax is imposed on the sale or exchange of long-term capital assets, which equals 2.9 percent multiplied by the portion of an individual's “Washington capital gains” exceeding $1 million.

"Washington capital gains" begins with the taxpayer's federal net long-term capital gain, which is then modified by certain statutory adjustments and deductions set forth in RCW 82.87.060.

Among the available deductions is a charitable donation deduction under RCW 82.87.080. In computing the tax, a taxpayer may deduct from Washington capital gains the amount donated to one or more "qualified organizations" during the same taxable year, but only to the extent the donations exceed $250,000 ^[1]. The maximum deduction is capped at $100,000 ^[2] per taxable year and may not be carried forward or backward to another tax reporting period.

It must also be noted that this maximum deduction cap is per tax return, regardless of the taxpayer's filing status. Thus, in the case of one joint tax return, the maximum charitable donation deduction is $100,000 although the return is filed by two individuals.

The ‘Qualified Organization’ Requirement

Critically, the charitable donation deduction is available only for donations made to a "qualified organization," which is defined as a nonprofit organization or any other organization that is:

1. eligible to receive a charitable contribution as defined in IRC § 170(c), and
2. "principally directed and managed within the state of Washington.”

The term “principally directed and managed"” is defined by WAC 458-20-300 (2)(m) to mean “the place where the organization's activities are primarily directed, controlled, and coordinated.”

This requirement differs significantly from the federal charitable deduction, which simply asks whether the organization is a qualified 501(c)(3) entity. Under Washington law, federal tax-exempt status alone is insufficient — the organization must also have its principal direction and management within Washington.

Why the DAF Contribution Is Not Itself Taxable

An important threshold point is that a contribution of appreciated stock to a DAF is not a realization event for either federal or Washington tax purposes.

Under IRC § 1001, a charitable contribution is not a "sale or other disposition" because the donor receives no "amount realized" — no money or other property in exchange — and therefore there is no realization event. This nonrecognition principle applies regardless of the magnitude of the built-in gain, provided the contribution is a bona fide completed gift where the sponsoring organization obtains exclusive legal control over the contributed assets.

Because the donation is a non-realization event under federal income tax law, it is not included in the individual's federal net long-term capital gain and therefore should not be included in "Washington capital gains." In other words, the appreciated stock contributed to the DAF does not itself generate Washington capital gains tax liability.

Where the Problem Arises

The issue is not whether the contribution itself is taxable. It is not. Rather, the problem arises when the taxpayer attempts to claim the charitable donation deduction under RCW 82.87.080 against other Washington capital gains. If the taxpayer has realized long-term capital gains from other transactions during the same taxable year and seeks to offset those gains with the charitable deduction, the taxpayer will be unable to do so if the DAF's sponsoring organization is not principally directed and managed within Washington.

Per WAC 458-20-300 (5)(b)(ii), the relevant entity for determining qualification is the DAF sponsor — not the ultimate charitable recipients of grants from the DAF. As the rule provides: "The organization to which you make the donation, and not the organization where the donation ends up, determines whether you donated to a qualified organization".

Thus, even if a taxpayer directs DAF grants exclusively to Washington-based charities, the deduction may be unavailable if the sponsoring organization itself is not principally directed and managed within Washington.

Conclusion

Washington taxpayers who use donor advised funds as part of their philanthropic strategy should carefully evaluate whether their DAF sponsor qualifies as a "qualified organization" under RCW 82.87.080 before assuming that the charitable donation deduction will be available to offset their Washington capital gains.

Given the limited published guidance on this issue and the potential for significant tax consequences, taxpayers are encouraged to consult with their tax advisers to assess whether alternative giving strategies or Washington-based DAF sponsors may better serve their planning objectives.

[1] This figure is adjusted annually for inflation. For the 2025 tax year, the figure is $278,000.

[2] This figure is also adjusted annually for inflation. For the 2025 tax year, the figure is $110,000.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the authors and not necessarily this law firm or its clients.