There are situations which are quite simple and, I agree with you they seem to be taxed the wrong way. It's just harder to fix than it seems because the spectru

There are situations which are quite simple and, I agree with you they seem to be taxed the wrong way. It's just harder to fix than it seems because the spectrum of what people actually do when involved in a business is wide. Most situations are something in between your example of a person who "knows" and mine of a chef. The chef in my example "knows" what kind of food to create for a given area - ie the intersection of demographics/tastes, the existing competition, locations etc. That expertise is equivalent to your "knowing". The chef might not even actually work day to day - he/she just had the initial insights. Now the chef has moved along the continuum towards a finance person. In almost all the modern successful PE operations, the teams are industry specialists (ie if you look under the hood at Blackstone, KKR etc, the people are organized by industry). They actually know a lot about the operations, what can be improved, what needs to be thrown out etc. They are something in between my "chef" and your "person who knows". By and large, they aren't timing markets. Even VCs are becoming industry focused as opposed to generic. Many are former founders. They have stepped down the continuum toward being a "chef". ie, most folks are in the grey area. WRT business sales - at least for PE/VC folks, the carried interest is calculated on the business sale. There are some situations where they can write things up or down, but it washes out - ie they can't just write it up arbitrarily - the value of the asset, and hence their capital - needs to have actually gone up.