Aug 27 2007 by Jason

How Will the New Tax Laws on Carry Affect Venture Capitalists?

Q: What’s going on with the changing tax situation on the “carry” relating to VC funds? Is it finalized? And how will this affect the VC market, if at all?

A: (Jason). Sandy Levin (from the great state of Michigan) introduced a bill recently to tax carried interests (“carry” or profit) as ordinary income, versus the long term capital gains treatment it enjoys today. The legislation is not finalized, but it is working through the channels. There is much debate on the differences between true venture capital investing versus other types of private equity and whether such tax modifications should apply to all private equity gains, or a limited scope (e.g. buy out versus venture).

I won’t go into the debate, as there are plenty of forums on the web.

As for potential ways the legislation, if approved, will affect the industry, it’s unclear. Some think that people in venture (who traditionally make less money than folks in PE and Buyout), will start looking to move to PE and Buyout. Others think that some folks will choose careers other than venture. Some think that more investment dollars will move offshore. It will be interesting to see how all of this shakes out over the coming months. One thing is for sure, if it does have a negative impact on the VC ecosystem, that affect will filter down to young, innovative companies in one way or the other.