Ohio continues to solidify its position as a premier destination for innovation capital. Originally enacted in the 2021 state budget (H.B. 110), the Venture Capital Gains Tax Deduction officially becomes effective for tax year 2026. This forward-looking incentive allows qualifying investors to deduct up to 100% of capital gains derived from eligible Ohio venture capital funds, effectively eliminating the state tax burden on successful local exits.
This policy arrives as Ohio’s venture ecosystem reaches a new maturity. The state has firmly established itself as the second-largest venture hub in the Midwest, trailing only Illinois. With PitchBook projecting a national resurgence in early-stage activity for 2026—driven by AI momentum and capital deployment cycles—this tax incentive is timed to capture the upside of the next market expansion.
How the Deduction Works
Beginning in tax year 2026, when Ohio implements its new flat income tax rate of 2.75%, investors can claim a deduction based on the geographic source of their gains. The incentive is bifurcated to reward local reinvestment while still acknowledging the global nature of venture portfolios:
- 100% Deduction: Capital gains received from a certified Ohio venture fund that are attributable to investments in Ohio-based companies are fully deductible. For an investor realizing a $1 million gain from an Ohio startup exit, this translates to a complete exemption from the 2.75% state tax, saving $27,500.
- 50% Deduction: Gains from the same certified fund attributable to non-Ohio companies are 50% deductible. In this scenario, the investor pays tax on only half the gain, reducing the effective state tax rate to 1.375%.
Certification and Eligibility
The deduction is not open to all private investments; it specifically targets committed capital flowing through professional intermediaries. To qualify, investors must hold an interest in an Ohio Venture Capital Operating Company (OVCOC).
The Ohio Department of Development certifies these funds annually based on strict criteria designed to ensure substantive economic impact:
- Capital Scale: The fund must manage or have capital commitments of at least $50 million in active assets.
- Local Leadership: At least two-thirds of the fund’s managing partners or general partners must be residents of Ohio.
Once certified, the fund handles the administrative burden, issuing tax certificates to limited partners that detail exactly which portion of distributed gains qualifies for the 100% versus the 50% rate.
Defining an “Ohio-Based” Business
To unlock the full 100% deduction, the underlying portfolio company must meet a clear economic nexus test. The statute defines an eligible Ohio business as one that is both headquartered in Ohio and maintains more than 50% of its full-time workforce within the state. This ensures that the tax-free status is reserved for exits that have driven tangible job creation and economic substance within Ohio’s borders.
What’s the Big Deal?
Over the past decade, Ohio has emerged as the Midwest’s second-largest venture hub, consistently raising over $1.2 billion annually. This resilience, anchored by health tech and enterprise software, positions the state to capitalize on the projected 2026 national rebound in early-stage VC. With the new capital gains deduction incentivizing local reinvestment, Ohio is projected to surpass $2 billion in annual venture funding—creating a timely window for investors to deploy capital.
Conclusion: Building a Tax-Efficient Investment Strategy
For investors, Ohio’s new Venture Capital Gains Deduction is more than just a tax break—it is a fundamental reshuffling of the incentive structure that makes the state one of the most tax-efficient environments in the nation for deploying early-stage capital. However, to fully maximize returns and mitigate risk, this deduction should not be viewed in isolation, but rather as the capstone of a broader “incentive stack.”
At the state level, investors should integrate the InvestOhio program, which offers a non-refundable personal income tax credit for cash injections into eligible small businesses, effectively providing an immediate ROI boost before an exit even occurs. Additionally, for those deploying capital into designated areas, Ohio Opportunity Zone tax credits—recently expanded to a $50 million annual cap for the 2026–2027 fiscal biennium—allow investors to secure a 10% transferable state credit. Investors should also recognize the operational efficiencies their portfolio companies now enjoy under the expanded Commercial Activity Tax (CAT) exclusion, which shields the first $6 million in gross receipts from state gross receipts tax, significantly preserving cash flow for early-stage ventures.
Finally, these state advantages should be paired with powerful federal incentives that have recently evolved. Section 1202 (QSBS) remains the gold standard, offering a 100% federal capital gains exclusion for stock held five years, with recent legislative updates providing new tiered exclusions (50% or 75%) for shorter holding periods of three and four years, respectively. For exits that happen too early for QSBS, Section 1045 allows for a tax-deferred rollover of gains into new qualified small business stock, keeping capital working tax-free. Investors should also ensure their portfolio companies utilize the Federal R&D Tax Credit, which now allows qualified startups to offset up to $500,000 annually against payroll taxes—a critical liquidity tool. When combined with the permanent exclusion available for 10-year holds in Federal Opportunity Zones, this comprehensive suite of federal and state incentives creates a powerful framework for maximizing after-tax returns in the Ohio innovation economy.
For more information or assistance evaluating the applicability of these incentives as a part of your investment strategy, contact Ted Theofrastous (TCT@kjk.com), chair of KJK’s IP, Technology & New Ventures practice group.