Washington State’s Proposed QSBS Tax Change Sparks Debate Among Startup Community

A controversial proposal to expand Washington state’s capital gains tax has ignited heated debate within Seattle’s startup ecosystem. Senate Bill 6229 (and companion House Bill 2292) would eliminate a key tax advantage that many founders, early employees, and investors have relied on when building high-risk, high-growth companies in the region. The change would specifically target qualified small business stock (QSBS), removing state-level tax exemptions that mirror long-established federal protections designed to reward entrepreneurial risk-taking.

Under current federal law, QSBS holders can exclude up to 100% of eligible gains from federal capital gains taxes if they meet specific requirements, including holding the stock for at least five years. Washington’s existing capital gains tax, approved in 2021, generally followed federal definitions of taxable gains and did not explicitly reject QSBS treatment. The new proposal would reverse this approach starting January 1, 2026, requiring founders and investors who sell qualifying shares to pay state capital gains tax on profits that would remain exempt at the federal level. For many startup team members who accepted equity as compensation in lieu of higher salaries, this could translate to tens or even hundreds of thousands of dollars in unexpected tax liability when their company is acquired or goes public.

The reaction from Seattle’s technology and venture capital communities has been swift and largely negative. Amy Harris, policy director for the Washington Technology Industry Association (WTIA), warns the proposal “weakens one of the few policies Washington has that actually rewards startup risk” and “sends exactly the wrong signal, effectively telling homegrown startups to build in Washington, but plan their success somewhere else.” Prominent Seattle venture capitalist Leslie Feinzaig described the proposal as potentially “catastrophic” for entrepreneurs and early employees making the “extraordinarily irrational, risky” choice to work at emerging startups. Dave Parker, another seasoned Seattle investor and advisor, predicted a “talent drain” if the legislation passes. Their concerns center on Washington potentially losing its competitive edge in attracting entrepreneurial talent and investment capital, especially as neighboring states maintain stronger tax incentives for company builders.

Not everyone in the tech community opposes the change, however. Brian Boland, former Facebook executive and founder of Delta Fund, argued that even with state taxes on QSBS gains, founders and investors would still enjoy substantial tax advantages compared to standard federal capital gains rates. “The bill moves from zero tax on gains which most people never get to experience to a smaller tax on gains,” Boland noted, adding that entrepreneurs shouldn’t be “excused from participating in taxes that pay for infrastructure that they use to actually build their business.” This perspective highlights the tension between maintaining competitive advantages for the startup ecosystem and addressing Washington’s broader fiscal challenges, including its notoriously regressive tax structure that places a heavier burden on lower-income residents.

The practical implications of the proposed change extend beyond immediate tax considerations. Madhu Singh, an attorney who advises founders and early-stage companies, questions whether top talent will still commit to Washington startups if they could potentially lose the full value of their QSBS tax advantages. Abe Othman, a Seattle-based researcher at AngelList, suggests the most significant risk may not be an immediate exodus but rather a gradual erosion of Washington’s startup pipeline over the next decade or more. “You’d still see successful startups but they will be happy accidents, and nobody will relocate to start their company in Seattle,” he warned, adding that such effects would be “slow or impossible to reverse” once they become apparent. The bill arrives at a particularly sensitive moment for Washington’s economic positioning, as the state faces a $2.3 billion budget shortfall through 2027 and lawmakers contemplate additional revenue measures, including a potential “millionaire’s tax” targeting high earners.

The debate over QSBS taxation reflects larger questions about how Washington—one of the few states without personal or corporate income taxes—should structure its revenue system while maintaining its attractiveness for innovation and entrepreneurship. Washington’s capital gains tax collected $560.6 million in 2024, up from $418.6 million in 2023, and the state already plans to implement progressive rates starting in 2025. Supporters of the new QSBS proposal see it as a reasonable step toward tax fairness, while critics worry about unintended consequences for the region’s innovation economy. As public hearings on the bills proceed, founders, investors, and policymakers face difficult questions about balancing fiscal responsibility with the conditions needed for startup success. The outcome may significantly influence whether the next generation of technology companies chooses to establish and grow their roots in Washington state or look elsewhere for more favorable conditions.