The three-year holding period is the requirement under Section 1061 of the Internal Revenue Code for carried interest gains to receive long-term capital gains treatment. While regular investors qualify for long-term rates after one year, fund managers receiving carried interest must hold the underlying investments for more than three years.
Why It Matters
This provision, enacted in 2017, primarily affects PE, growth equity, and hedge fund strategies where investments may be held for shorter periods. If the fund exits an investment within three years, the GP's carried interest on that investment is recharacterized as short-term capital gain and taxed at ordinary income rates. VC funds typically hold investments well beyond three years, making the provision less impactful for that strategy.
Key Details
- Applies only to the GP's carried interest allocation, not to LP returns.
- LPs still qualify for long-term treatment after the standard one-year holding period.
- The three-year rule applies per investment, not across the fund as a whole.
- VC funds are generally less affected because typical hold periods exceed three years.
- PE and hedge fund strategies with shorter holds see the most impact.
Capital Company tracks per-investment holding periods and applies Section 1061 recharacterization rules when preparing GP carried interest calculations.
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.