Washington’s new 9.9% millionaire income tax (ESSB 6346) takes effect January 1, 2028. A single large ISO exercise or NSO spread can push you over the $1 million threshold. The planning window is open now, but it is closing.
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Without Tax Strategy
Let us assume the entire $500,000 spread is treated as ordinary income in 2028. At a 37% federal rate plus Washington's 9.9% millionaire tax on the amount above $1 million, a high-earning employee faces combined exposure on every dollar of the spread. No deferral. No planning. Every dollar fully exposed.
With ISO Exercise and Hold Strategy
Let us assume the $500,000 gain qualifies for long-term capital gains treatment at 23.8% after a qualifying disposition, and the ISO exercise-and-hold completed before 2028 keeps the spread outside Washington base income entirely. Total federal tax: approximately $119,000. Washington millionaire tax: $0 on the ISO spread.
Let us assume a gain of $500,000. Washington 9.9% millionaire tax applies to household income above $1 million beginning January 1, 2028.
| Metric | NSO / Disqualifying Disposition (Post-2027) | ISO Qualifying Disposition – Pre-2028 Exercise and Hold |
|---|---|---|
| Total Gain at Exercise / Sale | $500,000 | $500,000 |
| Income Character | Ordinary income (enters federal AGI) | Long-term capital gain (ISO hold-and-sell) |
| Federal Tax Rate Applied | 37% | 23.8% |
| Federal Tax Due | $185,000 | $119,000 |
| Washington Millionaire Tax (9.9%) | Applies to spread above $1M threshold | ISO spread does not enter WA base income |
| AMT Exposure | None on spread | Potential AMT in exercise year; no WA add-back |
Estimated Combined Federal Savings from ISO Strategy (Pre-2028 Exercise)
$66,000+
Savings = (Spread × Rateord) − (Gain × Ratecap); Washington 9.9% millionaire tax additional exposure excluded from illustration and will vary based on total household income in the exercise year
Washington’s ESSB 6346 imposes a 9.9% tax on income above $1 million starting January 1, 2028, using federal AGI as its base. NSO exercises and ISO disqualifying dispositions flow directly into that base. Call your advisor before exercising.
NSO spreads are ordinary income that flows into federal AGI. Under ESSB 6346, that same income flows into Washington base income. An employee with base salary above $700,000 who exercises a $400,000 NSO spread in 2028 could owe 9.9% Washington tax on the portion above $1 million in addition to the 37% federal rate. Accelerating NSO exercises before January 1, 2028 while Washington has no income tax may eliminate this state-level exposure entirely.
When you exercise an ISO and hold the shares without selling, no ordinary income is recognized for federal purposes. Because ESSB 6346 starts with federal AGI and the statute contains no provision adding back AMT preference items, a pure ISO exercise and hold should not push you over the $1 million threshold for Washington purposes. This is one of the most significant planning advantages remaining for Washington equity holders before 2028.
A disqualifying disposition occurs when you sell ISO shares before meeting both holding period requirements. The spread at exercise becomes ordinary income, enters your federal AGI, and under ESSB 6346 flows directly into Washington taxable income. If total household income exceeds $1 million in that year, the full disqualifying spread above the threshold is subject to Washington's 9.9% rate on top of federal taxes.
When you exercise NSOs, the spread is treated as W-2 income subject to Social Security and Medicare taxes in addition to federal income tax. After 2027, Washington's 9.9% millionaire tax applies to that same amount above the $1 million threshold. For executives with large NSO grants, the combined exposure of FICA, 37% federal, and 9.9% Washington on a single exercise event in 2028 or later makes pre-2028 planning an urgent priority.
Not every exercise qualifies for favorable capital gains treatment. Under ESSB 6346, meeting ISO requirements takes on added significance: a qualifying disposition keeps the spread outside federal AGI and outside Washington base income, potentially avoiding the 9.9% millionaire tax entirely.
ISO Filing Requirements
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Granted Under a Written Plan Approved by Shareholders
The ISO must be granted under a formal equity incentive plan that has been approved by the company’s shareholders. Options granted outside an approved plan do not qualify as ISOs under IRC Section 422.
Exercise Price Equal to or Above Fair Market Value at Grant
The exercise price must be at least equal to the fair market value of the stock on the grant date. Discounted options do not qualify as ISOs, regardless of the company’s intention.
Employed by the Granting Company Through the Exercise Date
ISOs can only be exercised while you are employed by the granting company or within three months of termination. Post-employment exercises beyond the 90-day window disqualify the option from ISO treatment.
Two-Year Grant Hold and One-Year Post-Exercise Hold
To receive qualifying disposition treatment, you must hold the shares for more than two years from the grant date and more than one year from the exercise date. Both holding periods must be satisfied simultaneously.
Annual Vesting Limit of $100,000
No more than $100,000 worth of ISO options (measured by the exercise price on the grant date) may become exercisable for the first time in any single calendar year. Options exceeding this threshold in a given year are automatically treated as NSOs for that excess amount.
| Requirement | Criteria |
| Option type | ISO only (NSOs do not qualify for capital gains treatment at exercise) |
| Grant date hold | More than 2 years from grant date |
| Exercise date hold | More than 1 year from exercise date |
| Employment requirement | Employed through exercise or within 90-day post-termination window |
| Annual vesting cap | $100,000 or less first exercisable per year |
| Washington millionaire tax note | ISO exercise and hold does not enter WA base income under ESSB 6346; NSO spreads and disqualifying dispositions do. Pre-2028 exercise planning can eliminate state-level exposure above the $1 million threshold. |
If your options meet these requirements and you complete qualifying exercises before January 1, 2028, you may avoid Washington’s new 9.9% millionaire tax on the spread entirely. A single unplanned exercise in 2028 can cost far more than it would have in 2027. Verify before acting.
ESSB 6346 imposes a 9.9% tax on household income above $1 million starting January 1, 2028, using federal AGI as its base. NSO exercises and ISO disqualifying dispositions produce ordinary income that enters federal AGI and flows into Washington taxable income. A pure ISO exercise and hold does not enter federal AGI and should not push you over the threshold under current statute.
Yes, under current statute. ESSB 6346 starts with federal AGI, and the ISO spread at exercise does not enter federal AGI in a regular tax calculation, so it stays out of Washington base income as long as you hold the shares. Selling in the same year as exercise (a disqualifying disposition) converts the spread to ordinary income and subjects the amount above $1 million to the 9.9% Washington rate.
For most high earners in Washington, yes. An NSO exercise completed before 2028 faces only federal tax on the spread; the same exercise in 2028 or later adds Washington’s 9.9% on any amount above $1 million. The optimal timing depends on your total household income in the exercise year, AMT exposure from any ISO grants, and available liquidity.
AMT does not flow through federal AGI, and ESSB 6346 contains no provision to add back AMT preference items, so the ISO spread does not count toward Washington’s $1 million threshold even if it triggers federal AMT. You can manage AMT exposure by spreading exercises across multiple tax years and modeling your liability in advance. AMT paid is recoverable as a federal credit in future years when your regular tax exceeds your AMT.
The two taxes are distinct but offset each other: ESSB 6346 provides a 100% credit against the millionaire tax for Washington capital gains excise taxes already paid, so in most cases you will not owe both on the same gain. The 7% excise tax applies when you sell ISO shares and recognize a long-term gain above the annual threshold (indexed from $250,000). Careful modeling by year of exercise and year of sale is required to determine your net Washington exposure.
Disclaimer: This is not tax advice, and it is recommended to consult a tax professional, as every tax situation is unique.
