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This would NOT be capital gains income because it is ordinary income as compensation to you.
You cannot transfer the nature of the funds from one person to another. In other words, a capital gain for the customer paying you money does NOT make it a capital gain for you.
Capital gain requires YOU to invest YOUR money and, for the purposes of long term treatment, be considered invested for at least a year and a day (but you knew that part).
Also, this would *not* be customary to treat this as a capital gain to you in any respect.
On top of this ordinary/capital gain argument, cash is never a "capital gain" even though cash IS capital!
The only time that you can have a capital gain is if you shared in the account as an owner and the shares converted to your full ownership.
PE managers often get comped in shares of stock instead of a cash payment
At the time the stock is "earned" it is full taxable as ordinary income and this becomes the basis for the stock when sold later. THEN after holding the stock, the PE manager sells his personal holdings, NOW you have a cap gain
Imaging you are representing company ABCD which is about to have a liquidity event. The company pays you 1000 shares worth $5 each. You then have $5000 in ordinary income.
When the liquidity event occurs, you sell the shares for $10 each, and realize a $5K capital gain.
Of course, capital gains for investments held short-term are taxed at ordinary rates anyway, so the holding has to be long-term for any real benefit.
I'm not here to debate whether the comp is fair and equitable or not; just the taxation of the compensation.
However, being a former licensed broker, I don't even like the idea of sharing an account with a client. Too much legal exposure.
Compensation, when earned, cannot be capital in nature. It just isn't. There are too many fools out there in the financial businesses that don't know what they are talking about when they suggest that their compensation is not ordinary income. It always is. Most of these guys (maybe you as well, I don't know) are salespeople, not tax experts. They say things that may not be true when put under the spotlight.
In order to have a capital gain, you have to own a capital asset. Compensation is NOT an asset; it is income.
However, as I said earlier, you can get paid in things that are not cash, including capital assets. But the receipt of that asset is ORDINARY income. Always.
Sorry, but that article reinforces my points.
Per your citation
"The reason for this treatment is that a fund manager would make a substantial commitment of his own capital into the fund and carried interest would represent a portion of the manager's return on that investment. While hedge funds typically trade their investments actively, private equity firms tend to hold their investments for many years"
It requires that you have a stake.
When you are paid in cash or cash fee, that is not a stake coming back to you.
Not really contrary.
As you read, Congress has tried on many occasions (and still to this day) to try to make the wording clear that this is a completely true statement.
As with many things in life, the Golden Rule applies. Those with the Gold try to make the Rules.
What you really have to watch out for is if Congress passes a law then makes it retroactive! They have done that in the past!