Capital gains taxation and funding for start-ups

Alexander Edwards and Maximilian Todtenhaupt

No 18-046, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: We examine how capital gains taxes affect investment in start-up (i.e., pre-IPO) firms. Using data on capital raised by start-up firms in individual funding rounds, we estimate the effect of the SBJA of 2010, which implemented a full exemption from federal capital gains tax on the sale of qualified shares. Because of higher expected after-tax returns (lower future capital gains taxes), we hypothesize and find evidence consistent with this capital gains tax reduction increasing the amount of investment in start-up firms per funding round by about 12%. We also provide evidence that this effect is concentrated in start-up firms that are likely to be more financially sophisticated.

Keywords: Capital Gains Taxes; Start-ups; Tax Capitalization (search for similar items in EconPapers)
JEL-codes: G24 H25 M13 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-acc, nep-ent, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:18046

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