Capital gains taxation and funding for start-ups

Alexander Edwards and Maximilian Todtenhaupt

Journal of Financial Economics, 2020, vol. 138, issue 2, 549-571

Abstract: We examine how capital gains taxes affect investment in private start-up (i.e., pre-IPO) firms. Using data on capital raised in individual funding rounds, we estimate the effect of the 2010 SBJA, which implemented a full exemption from federal capital gains tax on the sale of qualified shares. Because of the resulting higher expected after-tax returns, 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%. The effect is stronger in start-up firms that are likely to have greater administrative capacity. We estimate that about one-third of the tax benefit is captured by investors.

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: 2020
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:2:p:549-571

DOI: 10.1016/j.jfineco.2020.06.009

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