Wealthy tech investors oppose unrealized gains tax, fearing it will stifle innovation and start-ups
A proposal to tax the unrealized gains of wealthy Americans has sparked significant backlash from Silicon Valley's richest investors, as reported by Financial Post.
United States Vice-President Kamala Harris, the Democratic nominee for the 2024 presidential election, recently introduced a tax plan aiming to raise nearly US$5tn over the next decade.
The plan includes a controversial tax on unrealized gains, which was also featured in President Joe Biden’s 2025 federal budget proposal.
Some technology investors have voiced strong opposition, arguing that the tax would discourage innovation by penalizing founders and investors in successful start-ups for the substantial increases in their companies' valuations.
Marc Andreessen, co-founder of the US$35bn venture capital firm Andreessen Horowitz, warned during a July podcast that the tax could make starting new companies “completely implausible.”
He said, “Venture capital just ends. Firms like ours don’t exist. Why on earth is anybody going to go do this versus going to Google and getting paid a lot of money every year in cash?”
The tax plan has also caused tension among Harris’s wealthy donors. Some of her campaign supporters have privately urged her to drop the proposal from her election platform, according to a New York Times report.
Harris has raised at least US$540m for her campaign, with contributions from several Silicon Valley groups, including VCs for Harris, which includes LinkedIn founder Reid Hoffman.
The idea of a “billionaire tax” was first proposed by Democratic Senator Ron Wyden of Oregon and originally targeted individuals with US$1bn or more in assets or those who earned US$100m in three consecutive years. This tax would have affected approximately 700 people.
The latest version of the proposal lowers the threshold to include “centi-millionaires” with wealth exceeding US$100m, though the exact number of people this would impact remains unclear.
The proposals aim to address inequalities in the US tax system, where the super-rich often pay a lower overall tax rate than most working families because income from wealth is taxed more favourably than income from labour.
A 2021 White House study revealed that the wealthiest 400 billionaire families in the US paid an average federal individual tax rate of 8.2 percent, compared to 13 percent for the average American taxpayer.
For instance, Amazon.com Inc. founder Jeff Bezos reported income of US$4.2bn between 2014 and 2018, while his wealth increased by US$99bn during that time, largely due to the appreciation of his Amazon shares.
Since Bezos did not sell these shares, the increase in value was not considered taxable income.
If Bezos were to pass his shares to his heirs, they would only pay capital gains tax on the increase in value from the time they inherited the shares to the time they sold them, meaning the unrealized gains during Bezos’s ownership would never be taxed as income.
Despite its ambitions, the tax proposal faces significant challenges before it could become law.
Even if Democrats secure a majority in Congress, the proposal would likely encounter substantial political opposition, and legal challenges could arise over whether the US has the constitutional authority to impose such a tax.
Valuing unrealized gains presents its own set of difficulties. In public markets, the sale of large blocks of shares could affect the market price, and privately held investments can be highly volatile, potentially resulting in a large tax bill one year and a refund the next.
Taxpayers would need sufficient liquidity to pay their tax bills, which might force them to borrow money or sell shares.
Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Institute, noted that taxing unrealized gains involves creating a “fictional transaction” and estimating gains that would have been realized, complicating the process.
However, Rosenthal dismissed concerns that the tax would threaten entrepreneurship, calling such claims “rubbish” and emphasizing that the benefits of achieving significant wealth outweigh the tax burden.
Founders and top executives of successful companies often receive most of their income in the form of stock, allowing them to decide how much income to realize each year and leaving much of it untaxed. Many avoid selling stock, opting instead to borrow against their assets to finance their lifestyles.
For example, Tesla Inc. CEO Elon Musk has stated that he receives almost no cash salary from his companies. When Musk purchased Twitter (now X) for US$44bn in 2022, he funded US$13bn of the transaction with bank loans, partially secured against Tesla stock.
Musk has been a vocal critic of the tax proposals since they were first introduced by Democrats in 2021. He responded to a tweet protesting the tax, stating, “Eventually, they run out of other people’s money and then they come for you.”
Musk and Andreessen are among several wealthy tech executives who have recently expressed support for Donald Trump in the 2024 election.
In the broader tech industry, founders of successful start-ups and their investors would face taxation on significant increases in the value of their equity through private share transactions, even if they have not bought or sold shares.
For instance, Stripe, a payments start-up, saw its valuation surge from US$36bn to US$95bn between 2020 and 2021. Under Harris’s proposal, an investor holding 10 percent of Stripe’s preferred stock during that period could owe up to US$1.5bn in taxes.
Stripe’s founders, Patrick, and John Collison, who own about 10 percent of the company’s common stock, would face similar challenges, especially as the company’s valuation has since dropped to US$70bn.
The proposals would allow the tax to be paid over nine annual instalments, potentially leading to claims for tax refunds on losses in value.
The tax could also discourage founders from taking their companies public if they believe their valuations are lower as private entities. Start-up investors at venture capital firms would be affected if their individual carried interest—the main component of their compensation—exceeds US$100m.
Carried interest is a performance fee that pays partners a percentage of the fund’s profits, usually around 20 percent.
Peter Hébert, co-founder of Lux Capital, noted that while the number of affected venture capital partners in Silicon Valley is small, the proposals represent an “illogical policy” with a low likelihood of becoming law.
