Carried Interest Tax Calculator

Carried interest is a profit share received for running other people’s money, and for decades it took long-term capital gains treatment on the same one-year holding period as everything else. Since 2018, section 1061 has applied a stricter clock to "applicable partnership interests" — carry, in substance: the holder’s net long-term gain is recomputed under section 1222 with three years substituted for one, and whatever fails the substitution is treated as short-term capital gain.

Short-term means ordinary rates. At the top, with the net investment income tax on both sides, the swing is 23.8% against 40.8% — seventeen points on every recharacterised dollar. The rule did not abolish the capital-gains treatment of carry, whatever the headlines said; it priced impatience.

The test is asset-by-asset and looks through the fund. What matters for gains allocated through the carry is how long the PARTNERSHIP held the company it sold — not how long the manager has held the carry. A ten-year-old carry is recharacterised on a two-year flip; a partner admitted last month takes long-term treatment on a deal the fund seasoned for five years. This surprises people in both directions, and it is the reporting the regulations force funds to hand their partners each year.

The first is seasoning, and it is why the rule quietly changed exit behaviour: a fund weighing a sale at month thirty-three of a hold has $136,000 of partner-level reasons per $800,000 of carry to wait for month thirty-seven. Private equity holding periods were mostly past three years already, which is why the section raised far less revenue than advertised; venture funds with quick markups and quicker acquisitions feel it more.

The second is the capital interest exception. Gains commensurate with capital the manager actually contributed — the GP commitment — are outside the section under 1061(c)(4)(B), tested under the ordinary one-year rule. The boundary is bookkeeping: the exception protects capital-account economics that match what outside investors get for their money, and funds that blur the line between the carry waterfall and the capital account put the exclusion at risk.

The third is the structural one. Subsection (a) recomputes net long-term gain only through paragraphs (3) and (4) of section 1222 — and section 1231 gains, the character of gains on depreciable business property, arrive at net capital gain without ever passing through those paragraphs. The regulations confirm what the mechanics imply: 1231 gains and qualified dividends are outside the recharacterisation entirely. A real-estate fund selling buildings generates carry that mostly never meets the three-year test. That is not a loophole someone found; it is how the section was drafted, and it has survived every technical-corrections cycle since.

Section 1061(d) is the one that catches sophisticated people. Transferring carry to a related person — the children’s trust, the spouse’s LLC — does not carry the holding period quietly across; the transfer is itself a recognition event, forcing short-term gain on the transferor for sub-three-year assets at that moment. Estate planning with carry happens, extensively, but it is planned around this subsection with valuation and timing, not through it.

The corporation exception is the other closed door. Subsection (c)(4)(A) excludes interests held by a corporation, and for one optimistic season that read like an invitation to hold carry through an S corporation — pass-through taxation with a corporate wrapper. The IRS said no within months, the regulations confine the exception to C corporations, and paying twenty-one percent corporate tax plus dividend tax to escape a seventeen-point recharacterisation is arithmetic nobody chooses.

What remains is the discipline the section actually imposes: deal-level holding-period records, clean separation of capital accounts from the carry waterfall, and exit calendars that notice the three-year line. The tax on carry was not repealed; it was made a scheduling problem — and this page prices the schedule.