Capital Gains Taxation and Funding for Start-Ups

56 Pages Posted: 4 Nov 2018

See all articles by Alexander Edwards

Alexander Edwards

University of Toronto - Rotman School of Management

Maximilian Todtenhaupt

Norwegian School of Economics (NHH); LMU Munich

Date Written: October 12, 2018


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

JEL Classification: M13, G24, H25

Suggested Citation

Edwards, Alexander S. and Todtenhaupt, Maximilian, Capital Gains Taxation and Funding for Start-Ups (October 12, 2018). Available at SSRN: or

Alexander S. Edwards

University of Toronto - Rotman School of Management ( email )

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

Maximilian Todtenhaupt (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045

HOME PAGE: http://

LMU Munich ( email )

Geschwister-Scholl-Platz 1
Munich, DE 80539

HOME PAGE: http://

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