Carried interest is a portion of the profits made from an investment that is paid to the investment manager. The manager typically receives a 20% share of the profits, but this can vary depending on the agreement. Carried interest is also sometimes referred to as a “carry” or a “performance fee.”
Why is carried interest important?
Carried interest is important because it provides an incentive for investment managers to generate profits for their investors. Without this incentive, managers would have less of an incentive to perform well and make money for their investors.
How is carried interest taxed?
Carried interest is typically taxed at the capital gains rate, which is lower than the income tax rate. This preferential treatment of carried interest has come under scrutiny in recent years, with some critics arguing that it should be taxed at the higher income tax rate.
What are the pros and cons of carried interest?
The main advantage of carried interest is that it provides an incentive for investment managers to generate profits for their investors. The main disadvantage of carried interest is that it may be taxed at a lower rate than other forms of income, which some critics argue is unfair.
Who benefits from carried interest?
Investment managers and the firms they work for typically benefit from carried interest. Investors also benefit from carried interest if it results in higher profits for them.
Who pays carried interest?
The firm that manages the investment typically pays carried interest to the investment manager. The investors in the fund may also indirectly pay carried interest if it results in higher profits for the fund.
What are some criticisms of carried interest?
Some critics argue that carried interest should be taxed at the higher income tax rate instead of the lower capital gains rate. Others argue that carried interest provides an unfair advantage to investment managers and firms that invest in private equity and hedge funds.
What is the future of carried interest?
The future of carried interest is unclear. Some lawmakers have proposed changes to the tax code that would eliminate the preferential treatment of carried interest, while others have defended it. It is possible that carried interest will continue to be taxed at the capital gains rate in the future, but this is not certain.