On Thursday, President Trump asked Republican lawmakers to end tax breaks on carried interest.
The tax break allows private equity and venture fund managers to treat their earnings from investments at a lower capital gains rate, rather than as ordinary income.
The removal of the tax break would be a big hit to the VC industry.
“Carried interest encourages smart, high-risk investments in innovative high-growth startups,” National Venture Capital Association (NVCA) President and CEO Bobby Franklin said in a statement.
Trump floated ending the carried interest loophole when he campaigned for president in 2016. However, when he assumed office for his first term, its elimination wasn’t included in the 2017 Tax Cuts and Jobs Act. Instead, the tax code was modified, extending the holding period for assets to qualify for the capital gains rate from one year to three years.
Since venture capital firms rarely sell assets a year after first making an investment, that modification was perfectly satisfactory for the industry.
“The 2017 Trump tax legislation kept venture investment flowing to emerging technologies like AI, crypto, life sciences, and national defense. A change now will disrupt that progress and disproportionately harm small investors, especially in middle America,” Franklin said.
Despite the NVCA’s concerns, the vast majority of capital invested in emerging tech companies comes from New York and Silicon Valley, with Northern California remaining particularly dominant.
