Most early stage entrepreneurs are aware of the importance of “sweat equity” where employees or contractors receive an equity stake in return for working for little or no cash. The tax treatment of this equity income by the IRS is extremely unfair, assessing a “phantom tax” on income that doesn’t exist. This is radically impeding the growth of new businesses in the US.

Parapent Solutions has launched an effort to change the federal tax code such that equity based compensation in small privately held businesses would not be a taxable event until a liquidity event occurred. At that point the initial basis value of the equity income would be taxed at ordinary income tax rates and the gain in value beyond that at capital gains tax rates.

Such a change to our federal tax code would create an environment whereby early stage companies could easily and effectively compensate employees and contractors with equity in lieu of cash and provide greater incentive for those individuals to accept such equity based compensation.

Parapent is coordinating letters to and meetings with Congressional Representatives to push for such a change.

If you’re interested, you can add your name to the list of people suporting this effort. More here.