Trump Expands Lavish Tax Dodge for Silicon Valley VCs and Private Equity
One venture capitalist gushed that the new tax rules mean “suitcase filled with tax-free Lamborghinis.”
President Donald Trump's sweeping tax and spending legislation, known as "One Big Beautiful Bill," offers dazzling benefits for early stage investors and startup founders.
The law expands a tax benefit to investors in start-ups known as ‘Qualified Small Business Stock,’ commonly referred to as QSBS, which exempts certain capital gains from taxes entirely. Trump’s law tweaks the already lucrative tax provision to make it much more generous, expanding the definition of a qualifying small business as one with assets up to $75 million.
The new QSBS standard could unlock billions of dollars in untaxed gains for savvy venture capitalists and other investors. Auren Hoffman, the general partner at Flex Capital, gushed that the new Trump rules represent a “suitcase filled with tax-free Lamborghinis.”
Under the previous iteration of the law, investors could claim tax-free QSBS on $10 million in gains or 10 times their initial investment, whichever is higher, after holding the shares for at least five years. The new Trump provision expands the investment to $15 million and allows exits earlier than five years. The law also pegs the new $75 million asset cap and investment gain threshold to inflation.
The new provision could bestow as much as $749 million in completely untaxable gains to a single investor who places the maximum investment in a new firm that grows ten fold.
Law firms advising the very rich have also pushed a novel attempt to multiply the QSBS benefit by passing startup shares onto family members through trusts. The so-called “stacking” or “peanut-buttering” strategy can be done an “infinite” amount of times when shares are granted as a gift. The loophole can result in billions in additional tax-free money when equity is sold.
The benefits flow overwhelmingly to the very wealthy. Internal Revenue Service data shows that over 90% of the QSBS gains have gone to individuals who report more than $1 millions of capital gains. The Joint Committee on Taxation projects that the new QSBS rules will cost $17.2 billion over the next decade, bringing the overall cost to the special tax break to $61.8 billion.
Silicon Valley venture capitalists and other investors have long pushed for an expansion of QSBS. The Financial Technology Association and the Angel Capital Association, were among signers of a letter backing the initial legislation sponsored by Rep. David Kustoff, R-Tenn., that became the basis for the QSBS rules that were folded into the One Big Beautiful Bill. The Senate bill was championed by Sen. John Cornyn, R-Tex.
The National Venture Capital Association, which represents Bessemer Venture Partners, Lux Capital, Andreessen Horowitz, and other major firms, also lobbied for the provision.
It’s not just technology firms set to benefit. The QSBS rules may also flow to private equity firms intent on restructuring the local businesses they buy up and roll into larger companies. "These changes present a substantial opportunity for private equity," noted a client alert last week by account firm RSM US LLP.
The Small Business Investor Alliance, a group that represents middle-market private equity firms such as Argosy Capital and Bluehenge Capital Partners, also pressed for the QSBS expansion.
The tax provision was initially a Democratic idea designed to stimulate economic growth. Senator Dale Bumpers, D-Ark., championed the initial legislation. He argued it would provide crucial capital access to "hundreds of thousands of small firms with good ideas but not enough capital."
President Bill Clinton's administration, with Bumpers as a fellow Arkansas Democrat and ally, quickly endorsed the proposal after taking office. The exemption became law in August 1993, initially allowing investors to avoid half the taxes on capital gains up to $10 million (later expanded to full exemption) or ten times their original investment, whichever was greater.
The initial $50 million threshold for qualification as a small business wasn't arbitrary. Congress specifically chose this figure to prevent the Walt Disney Company from benefiting through their newly created Mighty Ducks hockey team, which cost exactly $50 million. Lawmakers worried that allowing such a large corporation to exploit the tax break would trigger public opposition, according to congressional staff involved in drafting the legislation, according to a history of the provision from New York Times reporter Jesse Drucker and Maureen Farrell.
Ironically, what began as recession-era relief for struggling small businesses would eventually become a powerful tool for Silicon Valley's wealthiest investors. The technology sector's sophisticated financial strategies would later transform this modest tax incentive into a significant revenue stream, far exceeding lawmakers' original intentions.