Venture Capitalist Chimes in on Capital Gains Tax Increase

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The Rise of Capital Gains Tax Rates

President Biden’s tax proposal raises the top rate on long-term capital gains from 20% to 39.6%. This material increase affects those in the highest tax brackets – households earning more than $1 million. The increase wouldn’t apply to tax-deferred accounts, such as traditional IRAs or 401(k) plans.

Some economists have signaled concern that a higher capital gains tax might deter investment in small businesses across the nation. However, a recent CNBC interview with venture capitalist Alan Patricof presented a counter viewpoint, and perhaps allays some of that concern. 

Patricof believes that tax rates won’t affect whether or not an entrepreneur starts a company or an investor decides to fund a start-up. First, there’s a good chance that the proposed tax hike will be reduced after Congressional negotiations. Second, Patricof states that investors will continue to find value in and invest in companies they find appealing, regardless of the capital gains tax rate.

“’I think that investors in general are going to invest their money the way they have before, and I think that new companies will be started. I think that funds will be formed. Private equity will prosper,’ Patricof said.”

Investors Are Expecting a Rate Increase

That expectation has yet to affect the market today. Both high-income and other investors can and should consider various investment strategies to mitigate a higher capital gains tax, wherever the rate lands. Deductible charitable donations represent one way. Another way to stabilize long-term capital gains is to invest in QSBS.

There is no reason to believe that Biden’s tax plan won’t protect the QSBS tax exclusion, particularly since the exclusion was raised by the Obama administration. The ability to exclude up to 100% of capital gains taxes is generally well thought of as a component of an overall tax strategy designed to maximize innovation, risk-taking, and encourage investment in America’s future.

Looking for specific advice on QSBS? Contact us to learn more.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

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