The US suddenly taxes sovereign wealth funds, potentially accelerating the withdrawal of hundreds of billions of dollars from the US globally

The U.S. Internal Revenue Service, under the push of the Trump administration, released a major tax proposal in December last year, aiming to amend the tax exemption provisions for sovereign wealth funds and public pension funds in the Internal Revenue Code. This reform implies that the world's largest institutional investors, which previously enjoyed tax advantages, may now be required to pay taxes on their investments in the U.S., undoubtedly impacting the financing landscape of the American private equity industry.

Policy Core Content Analysis

Significant Reduction in Tax Exemption Scope

The key change by the IRS is the expansion of the definition of “business activities.” Activities previously considered purely investment actions may now be reclassified as taxable business activities. Specifically:

The Most Impacted Are Structured Investments

This policy has the greatest impact on how sovereign wealth funds and pension funds participate in private equity investments. These institutions often use Special Purpose Vehicles (SPVs) in joint investments with private equity firms, employing “blocker” structures to effectively avoid taxes. The new proposal directly targets this structure, meaning that previously used tax avoidance tools may become ineffective.

Capital Flows Have Already Changed

According to news reports, a series of policy shocks from the Trump administration have prompted sovereign wealth funds to start diversifying their investment exposure in the U.S. This is not hypothetical but an ongoing reality. This indicates:

• Sovereign wealth funds are highly sensitive to policy risks
• Capital reallocation has already begun, not waiting for formal policy implementation
• The attractiveness of the U.S. as a global capital hub is declining

Potential Chain Reactions

Short-term Impact

Under the new tax proposal, sovereign wealth funds need to reassess the cost-benefit ratio of their U.S. investments. If tax burdens increase significantly, these funds may reduce investments in U.S. private equity, real estate, and other assets. This could put pressure on American companies that rely on such funding.

Long-term Impact

This policy reflects a shift in the U.S. attitude towards foreign investment—from an open stance aimed at attracting global capital to a protectionist approach that taxes foreign investors. This may prompt a global reallocation of capital toward more friendly investment environments.

Potential Implications for Crypto Assets

Although the news primarily discusses traditional finance, this policy shift could indirectly impact the crypto asset ecosystem. If sovereign wealth funds and institutional capital reduce their allocations to traditional U.S. assets, they might explore other asset classes, including digital assets. Additionally, decentralized finance (DeFi) and on-chain investment tools could become more attractive to large institutional investors.

Summary

The U.S. tax reform targeting sovereign wealth funds is a continuation of the protectionist policies of the Trump administration, focusing on expanding the scope of taxation and shrinking investment exemptions. This reform has already begun influencing global capital allocation decisions, with sovereign wealth funds accelerating their diversification away from U.S. investments. In the short term, this could pressure private equity financing in the U.S.; in the long term, it signals a profound adjustment in the global capital landscape. For the crypto market, this may mean an increased trend toward diversified institutional capital allocations, though the specific impact remains to be seen based on the final implementation of the policy.