the angel investor tax loophole
From my column today:
Consider the special provision for “qualified small business stock,” which provides a zero percent tax rate on capital gains from certain investments. A better name would be the “angel investor loophole.”The tax break mainly benefits angel investors, who are individuals often retired entrepreneurs who invest in early stage companies. As these start-ups grow, they seek funding by venture capitalists, eventually seeking to be acquired or sell stock to the public. Venture capitalists have held on to their own special tax break for carried interest.The special rules for qualified small business stock were first enacted back in 1993. The rules offered a 50 percent exclusion from the then-applicable 28 percent rate for capital gains, creating an effective 14 percent rate.But as the base rate on capital gains dropped down during the last decade to 20 percent and then to 15 percent, the 14 percent rate for qualified small business stock became trivial. Then in 2009, the American Recovery and Reinvestment Act knocked the special rate for qualified small business stock down to 7 percent. That was followed up in 2010 by a bill taking the special rate down to zero.