Carried Interest Repeal: Impact on Startup Investment

President Trump Calls for Carried Interest Tax Break to End

During a recent address on Thursday, President Trump urged Republican legislators to eliminate the tax break associated with carried interest.

Understanding Carried Interest

This tax provision permits managers of private equity and venture capital funds to have their investment earnings taxed at the lower capital gains rate. Typically, these earnings would be subject to taxation as ordinary income.

The potential removal of this tax benefit is anticipated to significantly impact the venture capital (VC) industry.

NVCA Response

Bobby Franklin, president and CEO of the National Venture Capital Association (NVCA), released a statement emphasizing the importance of carried interest. He stated, “Carried interest fosters intelligent, high-risk investments within innovative, rapidly expanding startups.”

Past Considerations and the 2017 Tax Act

The possibility of closing the carried interest loophole was initially raised by Trump during his 2016 presidential campaign.

However, upon taking office, the elimination of this tax break was not incorporated into the 2017 Tax Cuts and Jobs Act.

Instead, the tax regulations were altered to extend the required holding period for assets to qualify for the capital gains rate. This period was increased from one year to three years.

Given that venture capital firms infrequently divest assets within the first year of investment, this modification proved acceptable to the industry.

Potential Consequences of Change

Franklin further explained that, “The 2017 tax legislation enacted under President Trump continued to facilitate venture investment in groundbreaking technologies, including AI, cryptocurrency, life sciences, and national defense. A reversal of course at this juncture would impede this advancement and negatively affect smaller investors, particularly those located in the Midwest.”

Geographic Distribution of Investment

Despite the NVCA’s expressed concerns, the majority of capital channeled into emerging technology companies originates from New York and Silicon Valley.

Northern California continues to be a particularly dominant hub for such investments.

Key Takeaway: The debate surrounding the carried interest tax break highlights the tension between potential government revenue and the encouragement of investment in innovative startups.