The “Carried Interest” tax loophole

In my opinion, the “carried interest” tax loophole should be eliminated. In December of 2009, The U.S. House of Representatives passed a bill to eliminate this loophole, however, this issue has not moved forward since then.

The “carried interest” tax loophole allows hedge fund and private equity partners to pay the capital gains tax rate on what is usually the most significant portion of their income. Hedge funds typically charge a management fee of 2% of assets under management, plus 20% of all portfolio gains. The management fee is taxed as ordinary income, however, the 20% of portfolio gains is considered “carried interest,” and is taxed at the long-term capital gains rate. However, if a corporation (as opposed to a partnership) charges an administrative fee plus a percentage of gains, the entire amount is taxable as ordinary income.

Despite the fact that capital gains tax rates are scheduled to increase in 2011, the new maximum rate of 20% (up from 15%) pales in comparison to taxes on ordinary income (note: “collectibles” held one year or longer are taxed at 28%, gold and silver are taxed as collectibles).  In order to help decrease the federal budget deficit, I think it would be a good idea to close this loophole.

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1 Comment

Filed under Finance

One response to “The “Carried Interest” tax loophole

  1. Greg Collier

    Since the writing of this blog post, the Bush tax cuts were extended. Therefore, the maximum capital gains tax rate remains at 15% through at least 2012.

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