Carried Interests in the Crosshairs (Again)

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Democrats have proposed a bill to tax carried interests at ordinary income rates.

Under current law, fund managers generally recognize income or gain in respect of their carried interests only when the fund sells assets that give rise to the income or gain. If the sale occurs more than three years after the fund acquired the relevant assets, then the fund managers generally recognize long-term capital gains instead of ordinary income. Individuals are entitled to preferential tax rates in respect of long-term capital gains. For more information on the taxation of carried interests, see our previous coverage.

Biden has previously vowed to end the perceived carried interest “loophole.” Moreover, this is not the first time Democrats have proposed to tax carried interests as ordinary income. As we previously reported, a similar proposal was made in 2019.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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