By Yuliya Chernova

Some New York tech founders and investors are opposing a plan in the state legislature to increase taxes on capital gains for startups.

Tech:NYC, a nonprofit advocacy group for the city's tech sector, has collected more than 1,000 signatures from founders and investors for a letter opposing the tax increase to be shared with state lawmakers. "We are very concerned that this proposal would weaken New York's startup ecosystem, which is a key driver of the State's economic growth," the letter said.

The state Senate's 2026-2027 budget proposal includes a provision that would impose city and state income tax on gains from startup exits, which are currently excluded from federal taxes, according to a description by the law firm Patterson Belknap Webb & Tyler.

The federal exclusion under the Qualified Small Business Stock regime allows eligible noncorporate investors to exclude up to 100% of capital gains from the sale of qualified stock up to $15 million. Most states follow the same exclusions as the federal government. However, California, home to many venture capitalists, doesn't honor this exclusion, according to the Institute on Taxation and Economic Policy, a nonprofit that published a paper saying the exclusion "enriches the wealthy."

Democratic State Sen. Andrew Gounardes, who sponsored the proposal to tax QSBS gains, said in a social-media post that the tax break has "become a tax avoidance tool that mostly benefits corporate investors -- especially venture capitalists in tech."

Engagement with Tech:NYC's letter was unusually strong, said Julie Samuels, the group's president and chief executive. "These are not big companies," she said. "This is about the startups, the founders of those startups, the early employees and the investors who invest in them."

This provision is just one of numerous tax-increase initiatives many Democratic-led states are seeking to enact while Republican-led states are increasingly cutting taxes to attract businesses and residents.

If the New York state Senate proposal goes through, then founders and investors would pay New York taxes on up to an additional $5 million or $15 million in gains, depending on which version gets adopted, according to Michael Arlein, chair of Patterson Belknap's practice group focused on founders and entrepreneurs. The top rate in New York is 10.9%, while the top rate in New York City is an additional 3.876%, he said.

The state budget is due April 1. It is unclear whether the New York State Assembly or governor will adopt the state Senate provision, Patterson Belknap lawyers wrote.

The law firm's note suggested that "founders with imminent liquidity events should consider accelerating relocation plans out of New York, if feasible," to avoid the possible tax increase. Arlein said he has received several calls asking about the logistics of relocating. Only the founder would have to move, not the entire company, he said.

"We believe if this passes, it will dramatically hurt the NY tech ecosystem," Benjamin Sun, co-founder and general partner at Primary Venture Partners, wrote on X. "New York would become one of the most punitive states in the country for founders at exit -- right as New Jersey and Connecticut are moving in the opposite direction," he added.

A tax increase of this nature won't necessarily be as big a deal as some believe for the New York startup community, said Charlie O'Donnell, a coach to venture capitalists and founder of venture firm Brooklyn Bridge Ventures.

"I'm not moving," said O'Donnell, who lives in Brooklyn. "We're lucky to make enough money to be able to afford to live here, and the removal of this exemption isn't going to change our standard of living," he said.

He said he isn't sure which of the options for closing government budget gaps are best, but overall he is fine paying more. "Everyone who believes people deserve basic support has to be willing to reach a little deeper into their pockets if they have deeper pockets. That includes me."

Write to Yuliya Chernova at yuliya.chernova@wsj.com

(END) Dow Jones Newswires

March 24, 2026 05:30 ET (09:30 GMT)