Summary:
President Trump pushes to end tax breaks on carried interest.
Carried interest allows VCs to benefit from lower capital gains tax rates.
NVCA warns that repeal could harm investments in high-growth startups.
Changes to tax law could disrupt funding for emerging technologies.
Most VC funding comes from New York and Silicon Valley.
On Thursday, President Trump urged Republican lawmakers to eliminate tax breaks on carried interest, a move that could significantly impact the venture capital (VC) industry. This tax break currently allows private equity and venture fund managers to benefit from lower capital gains rates on their earnings from investments, rather than being taxed as ordinary income.
The National Venture Capital Association (NVCA) has voiced strong concerns, stating that the repeal would undermine high-risk investments in innovative, high-growth startups. NVCA President and CEO Bobby Franklin commented, "Carried interest encourages smart, high-risk investments in innovative high-growth startups."
While Trump had previously suggested ending this loophole during his 2016 presidential campaign, it was not included in the 2017 Tax Cuts and Jobs Act. Instead, the tax code was modified to extend the holding period for assets to qualify for the capital gains rate from one year to three years. This change was acceptable to the industry, as VC firms typically do not sell assets within a year of investing.
Franklin warned that any changes now could disrupt the flow of venture investments into emerging technologies such as AI, crypto, life sciences, and national defense, disproportionately affecting small investors, particularly in middle America. Despite NVCA's concerns, most capital invested in emerging tech companies originates from New York and Silicon Valley, with Northern California being particularly dominant.
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