Silicon Valley investors and entrepreneurs are fretting over whether a future Kamala Harris administration would implement a tax policy that could have massive implications for venture capital and startups.
After the Harris campaign said it supported a tax proposal put forward this year by the Biden administration, techies exploded over a provision in the 250-page document about implementing a tax on unrealized capital gains, assets held but not yet sold.
Silicon Valley runs on equity. People build startups or join them and hope the shares they receive as part of their compensation will one day be worth life-changing sums, in exchange for long hours, instability, and the risk of failure.
“Most startups are not liquid,” said Siqi Chen, founder of the finance platform Runway, which is backed by Andreessen Horowitz. “You have shares on paper. It’ll either be worth a lot of money or $0.”
Capital gains tax applies when an asset is sold. The idea of taxing unrealized gains is aimed at ensuring the ultra-rich pay taxes on wealth they may hold onto and benefit from instead of selling.
The White House proposal says individuals whose wealth exceeds $100 million would pay at least 25% tax on their total income (page 91 of the PDF), including unrealized capital gains.
When venture capitalists Ben Horowitz and Marc Andreessen took to their podcast to explain why they had decided to back Donald Trump in the presidential election, they took issue with the proposed tax. They noted that while it is marketed as a tax that targets billionaires, the proposal would apply to anyone worth more than $100 million.
But the proposal also has stipulations that may mean it might not apply to many startup founders — most of whom don’t have the necessary $100 million anyway. It says it would define taxpayers as “illiquid” if their tradable assets — those they could easily sell, unlike shares in private companies — make up less than 20% of their wealth. That means founders who have raised hundreds of millions of dollars for their companies at unicorn valuations, but whose private shares account for the bulk of their wealth, would be able to defer those taxes and back-pay them upon selling.
“A lot of people are thinking about how it’ll impact them personally. For 99.9% of employees or even executives out there, they’ll never be touched by this,” said Vieje Piauwasdy, head of liquidity at SecFi, which helps startup employees manage their shares. “There’s the argument that it’ll creep into lower and lower tax brackets. Of course, that’s always a possibility.”
The plan also says that if someone ends up overpaying because the asset dropped in value when it was realized, they’d get a refund if they didn’t owe other taxes. Of course, in startup-land, private valuations fluctuate wildly all the time. Convoy, the Seattle-based trucking startup founded by a former Amazon executive, was valued at $3.8 billion in 2022 before it shut down last year — reportedly without paying employees severance. The healthcare startup Olive AI, once valued at nearly $4 billion, sold some of its parts and also shut down in 2023.
“If you had $100 million in equity in a company, it could very easily go to zero,” Chen said. He added that many reasonable people in tech, including him, would support taxing the ultra-wealthy more.
“The devil is in the details here,” he said. “If your company went public and you have a gazillion dollars, and you decide to not sell because you don’t want to pay the taxes … I do think there should be some kind of policy solution.”
Erica York, a senior economist at the nonprofit Tax Foundation, said it’s unclear how many people would be subject to the rigamarole of determining whether the tax applies to them. Regardless of whether it applies to only a small sliver of taxpayers, she said, “I still would characterize it as a bad idea.”
“It increases the tax burden on saving and investment, which is not how we want to structure the tax code if our goal is increased entrepreneurship and an environment that doesn’t discourage risk-taking,” York said. Plus, it would be a nightmare to implement and enforce compliance on, given that “it’s insanely complex to determine a value for something that isn’t a tradable asset.”
“If you want to kill the United States’ best competitive advantage, pass an unrealized capital gains tax,” said Bradley Tusk, a venture capitalist and political consultant. Tusk agrees with the general idea of a wealth tax and supports proposals such as universal basic income. But, he said, “assuming that you think that innovation is generally a good thing,” an unrealized capital gains tax is “the worst thing you could possibly do.”