Hi from Just Answer. I'm PDtax. I'll assist.
Carried interest is a quirk in US investment fund law which allows management fees for the fund to be considered capital in nature, and not income like one would typically think of fees. Some management fees are ordinary in nature, but most are still considered carried interest.
After all, attorney fees, CPA fees, even brokerage fees are ordinary income to their recipients. Management fees paid to hedge fund management as a percentage for account management are, but the bulk of their fees, paid as participation after investors are paid, are not. Since they are often paid in shares of the funds they manage, that is considered a carried interest, or investment, for the hedge fund manager.
As such, when they sell their shares, the income they receive is taxed as capital gains. The concept considers not only the years such investments are typically held by management, but investments of their own made by management in the fund.
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