Long-term capital gains are gains on assets held for more than one year (or more than three years for carried interest under Section 1061), taxed at preferential rates compared to ordinary income.
Why It Matters
For individuals, long-term capital gains rates are 0%, 15%, or 20% depending on income, plus the 3.8% net investment income tax (NIIT) for high earners. These rates are significantly lower than ordinary income rates (up to 37%). Private fund investors benefit from long-term capital gains treatment when the fund holds portfolio investments for longer than the applicable holding period. Most VC and PE fund returns are structured to qualify for long-term treatment.
Key Details
- Standard holding period: more than one year for regular investors.
- Carried interest holding period: more than three years under Section 1061.
- Maximum federal rate: 20% plus 3.8% NIIT for high-income taxpayers.
- The character of gains (long-term vs. short-term) passes through to investors on K-1s.
- Fund holding period strategy directly affects the after-tax returns investors receive.
Capital Company tracks holding periods at the investment level and reports gain characterization on investor K-1s as part of fund tax administration.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation.