What is "carried interest" 💰 taxation and why is everyone so excited about it (again)?
⚖️ Is it fair?
(A big post and a chart explaining how this works 📊)
Carried interest is the share of an investment fund's profits earned by the investment manager (the GP). GPs typically take 20-30% of the fund's profits (sometimes after investors receive a priority return).
It got its name from centuries ago when people on merchant ships got a share of the goods they "carried" across the ocean. ⛵️
Carried interest is a key component of GP compensation.
It's the red line in the chart.
The second type of compensation earned by GPs is management fees. These are ~ guaranteed fees, often based on fund size. For example, the GP might earn a management fee equal to 2% of the fund size annually.
These fees are the green line in the chart above.
Management fees are taxed at *ordinary* rates - up to 37% federally. 🏦