Growing Japan’s domestic venture by introducing QSBS

In my last article, I talked about how startups follow the money and if Japan wanted to boost innovation and have more startups, it needed to increase the capital available to founders. While there may be many ways to do this, today I want to talk about one of those ways: tax incentives.

Taxes may not be the sexiest topic in the world, but they are extremely important to the mathematics of business and investment. And the nice thing about taxes and tax policy is that it is something the government can change immediately without needing collaboration with other parts of the business ecosystem.

The mathematics of investing

That matters more in venture than in most asset classes. A venture portfolio is usually carried by a small number of companies. The median investment can fail and the fund can still work because one company returns the fund. Tax policy hits at the exact moment the asset class finally makes its money. 

Take a simple Japanese example. An investor puts ¥100 million into a startup. Years later, the shares are worth ¥1 billion. The gain is ¥900 million. At Japan's standard tax rate of about 20.315 percent on gains from shares, the tax bill is roughly ¥183 million.

The company does not need to grow any faster for tax policy to change the investment result. Make the qualifying gain tax-free and the investor simply keeps an extra ¥183 million, and the expected value of every startup bet in the country just went up. Nobody invests in a bad company because the taxes are attractive. But plenty of decisions sit near the line between yes and no, and tax policy moves that line so that investors can invest more and take slightly riskier bets.

Introduction to QSBS

QSBS stands for Qualified Small Business Stock. It is an American tax incentive created in 1993. If you buy newly issued stock in a qualifying early-stage American company (less than $75M in assets), hold it long enough, then you can possibly pay zero federal tax on the gain when you sell. Under the version that took effect in July 2025, an investor can exclude up to $15 million of gain per company, or ten times what they put in, whichever is greater. This new version is a tiered system: half the gain comes out tax-free at three years, three quarters at four, and the full amount at five.

While this is often a huge boon for founders and early employees, it is also great for venture. When a fund holds QSBS, the exclusion flows through the fund to the limited partners who put the money in and to the general partners who run it. The handful of winners that carry a fund often come out with little or no federal tax on top. This directly improves the outcomes for the people and organizations deciding if they should invest into a new domestic VC fund or not.

This is also not a little known tax incentive. The U.S. Treasury’s researchers found that there were more than $140 billion in QSBS exclusions between 2012 and 2022. In Silicon Valley we all know the rule at company formation, we plan around it at every financing, and we take advantage of it at every liquidation opportunity.

What Japan has today

In Japan there already exists the Angel Tax System. The Angel Tax System reduces an individual investor's taxes when they invest in a qualifying startup. The system makes the initial check cheaper, rewards reinvestment, and softens the loss when a startup fails.

While these incentives are nice, the Angel Tax System comes with some real downsides. The biggest one is that the current system only allows for individual investors and not institutional venture firms. Additionally it only helps with the initial investment, but does not create any reward on the other end. Instead in Japan an investor who patiently backs a five-person startup will pay the same tax rate on any gains as an investor trading shares in a mature public company. The risks are not remotely similar, but the current tax code treats them as though they are.

What Japanese QSBS could look like

Japan shouldn’t copy the American statute word for word. Company formations are different and the details need to fit Japanese law. But the goal is simple to state: invest in a qualifying young Japanese company, hold the shares for a number of years, then pay no tax on any gains up to a generous cap. And critically, let the benefit pass through approved domestic venture funds, so it reaches the LPs and GPs, not just individual angels writing direct checks.

Eligibility should be determined when the investment is made. A company should be able to give an investor a government-backed certificate showing that the shares qualify, instead of asking everyone to guess what the tax authority will decide 3-7 years later. Japan already uses confirmation certificates in parts of the Angel Tax System, so this would build on an existing process rather than invent an entirely new bureaucracy.

With this, and possibly other incentives, I would love to see a rise in domestic venture firms in Japan. It needs to be extremely profitable to invest in the next generation of Japanese innovation. And incentives like QSBS would help make it even more so.