As Clinton and Trump Call for Tax Reform, Silicon Valley Must Prove VCs Are Special

Venture capitalists are now the ones making a pitch. As both major presidential candidates promote U.S. tax policies aimed at ending special tax treatment for investment managers' income, Silicon Valley is girding itself for potential reforms. Venture investors, facing the possibility of bigger tax bills, are trying to convince Washington that they’re special and should be exempt.

At issue is a decades-old tax rule on carried interest, which is the share of profit awarded to fund managers when selling their stakes, or when companies are acquired or go public. Investment managers say that paying them in carried interest ties their compensation to the performance of long-term, often riskier, investments. Under current law, their carried-interest income qualifies for being taxed as capital gains at a rate as low as 23.8 percent, compared with the top individual income-tax rate of 43.4 percent on ordinary income.