Taxation of Private Equity and Hedge Fund Partnerships: Characterization of Carried Interest

Donald J. Marples
Specialist in Public Finance

General partners in most private equity and hedge funds are compensated in two ways. First, to the extent that they contribute their capital in the funds, they share in the appreciation of the assets. Second, they charge the limited partners two kinds of annual fees: a percentage of total fund assets (usually in the 1% to 2% range), and a percentage of the fund's earnings (usually 15% to 25%, once specified benchmarks are met). The latter performance fee is called "carried interest" and is treated, or characterized, as capital gains under current tax rules. In the 111th Congress, the House-passed Tax Extenders Act of 2009, H.R. 4213, H.R. 1935, and the President's 2010 and 2011 Budget Proposals would make carried interest taxable as ordinary income while a proposed amendment to H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, would treat a portion of carried interest as ordinary income. In addition, in the 110th Congress, H.R. 6275, would have made carried interest taxable as ordinary income. Other legislation (H.R. 2834 and H.R. 3996) made similar proposals. This report provides background on the issues related to the debate concerning the characterization of carried interest.


Date of Report:May 21, 2010
Number of Pages: 7
Order Number: RS22717
Price: $19.95

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