Capital Gains Taxation and Startup Founders
Researchers examined the effects of shifting from realization-based to accrual-based capital gains taxation on venture-backed startup founders in the US. The study found that such a shift would lead to greater ownership dilution for successful founders but also provide some insurance to those who fail.
The US capital gains tax is realization-based, meaning taxes are due when assets are sold. Critics argue this approach allows asset holders to defer tax obligations. An alternative approach, taxing gains on accrual, would require asset holders to value assets periodically and pay tax on gains. Researchers studied the effects of shifting to accrual-based taxation on venture-backed startup founders. They found that successful founders would face greater ownership dilution, while unsuccessful founders would receive tax credits as insurance. The study used a dataset of 96,000 US venture capital-backed startups and found that the average founder ownership at exit would fall by 25% under an accrual-based system. The average founder payoff would decline by 15%. However, the share of founders receiving a positive payoff would rise from 16% to 47% if accrual taxation provided fully refundable tax credits.
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