The National Venture Capital Association (NVCA) has raised alarms over a proposed change in tax breaks on carried interest, which they argue could significantly impact small investors, particularly in middle America. The concern comes amidst discussions to repeal the carried interest loophole, a move that NVCA fears would disrupt the flow of investments into emerging technologies. President Trump had advocated for the closure of this loophole since his 2016 campaign, but it was not included in the 2017 Tax Cuts and Jobs Act. Instead, the tax code was modified to require a longer holding period for assets to qualify for the capital gains rate.
The carried interest provision is crucial for venture capital firms that often hold onto investments for more than a year before selling. These firms have played a pivotal role in channeling capital into innovative sectors such as artificial intelligence, cryptocurrency, life sciences, and national defense. A substantial portion of this capital originates from New York and Silicon Valley, with Northern California being particularly dominant. Despite this concentration, the NVCA emphasizes that small investors across the country, especially those in middle America, stand to lose significantly if the tax break is repealed.
"Carried interest encourages smart, high-risk investments in innovative high-growth startups," – Bobby Franklin
The NVCA President and CEO Bobby Franklin has voiced concerns that removing this tax break could severely impact the venture capital industry. He asserts that the 2017 Trump tax legislation successfully kept venture capital flowing into emerging technologies. Franklin argues that any changes now would not only hinder progress but would also place undue strain on smaller investors who rely on these financial structures to participate in high-growth opportunities.
"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," – Bobby Franklin
While President Trump had initially floated the idea of eliminating the carried interest loophole during his presidential campaign, it was not enacted in his major tax reform. Instead, the modification required a three-year holding period for assets to benefit from the capital gains rate—a change that the industry found satisfactory at the time. The NVCA warns that dismantling the current structure would be a significant setback for venture capital firms and small investors alike.
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