Short-term capital gains are gains on assets held for one year or less, taxed at ordinary income rates (up to 37% for individuals, plus the 3.8% net investment income tax).
Why It Matters
For carried interest specifically, the threshold is three years under Section 1061: gains on investments held three years or less are recharacterized as short-term for the GP. Hedge funds and strategies with shorter holding periods generate more short-term gains, which is one reason the tax treatment of different fund strategies varies significantly. Short-term gains can nearly double the effective tax rate on investment returns compared to long-term treatment.
Key Details
- Taxed at ordinary income rates: up to 37% plus 3.8% NIIT.
- Standard threshold: one year or less for regular investors.
- Carried interest threshold: three years or less under Section 1061.
- The character of gains passes through to investors on K-1s.
- Fund strategy and holding periods directly affect the mix of short-term vs. long-term gains.
Capital Company tracks holding periods and gain characterization at the investment level, reporting short-term and long-term components on each investor's K-1.
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.