Capital Gains Taxation and Funding for Start-Ups

64 Pages Posted: 4 Nov 2018 Last revised: 20 Dec 2019

See all articles by Alexander Edwards

Alexander Edwards

University of Toronto - Rotman School of Management

Maximilian Todtenhaupt

Norwegian School of Economics (NHH)

Date Written: October 7, 2018

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

JEL Classification: M13, G24, H25

Suggested Citation

Edwards, Alexander S. and Todtenhaupt, Maximilian, Capital Gains Taxation and Funding for Start-Ups (October 7, 2018). Available at SSRN: https://ssrn.com/abstract=3265385 or http://dx.doi.org/10.2139/ssrn.3265385

Alexander S. Edwards

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Maximilian Todtenhaupt (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://https://sites.google.com/view/todtenhaupt

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