President Trump urged Republican lawmakers on Thursday to eliminate tax breaks on carried interest.
This tax break allows managers of private equity and venture funds to pay a lower capital gains rate on their investment earnings, rather than the ordinary income rate.
Ending this tax break would have a significant impact on the VC industry.
National Venture Capital Association (NVCA) President and CEO Bobby Franklin stated that “Carried interest encourages smart, high-risk investments in innovative high-growth startups.”
During his 2016 presidential campaign, Trump proposed closing the carried interest loophole. However, it was not eliminated in the 2017 Tax Cuts and Jobs Act. Instead, the tax code was adjusted to require a three-year holding period for assets to qualify for the capital gains rate, up from one year.
Since venture capital firms typically hold onto assets for longer than a year, this modification was acceptable to the industry.
Franklin expressed concerns that changing the tax law now could disrupt venture investment in emerging technologies and disproportionately affect small investors.
Despite NVCA’s worries, the majority of capital investment in emerging tech companies comes from New York and Silicon Valley, with Northern California being particularly dominant.
