The Internal Revenue Service (IRS) recently notched a key legal win against hedge funds and asset managers, according to a Wall Street Journal report. The case centers on “carried interest” – the share of fund profits paid to managers.
The IRS victory classifies carried interest as ordinary income subject to higher tax rates, rather than capital gains with preferential rates. This precedent could force managers to pay heightened taxes on performance fees. Industry groups warn it could curb risk-taking and entrepreneurship.
This decision adds operational headaches for fund managers already navigating challenging macro conditions, as it concerns the imposition of self-employment taxes on the bulk of fund manager’s income. This could result in a decrease of 3% in the managers fee structure, so the obvious question is, should this additional tax get passed along to investors through higher management or performance fees? And if so, would it be only the larger, more established fund managers who would have the pricing power to impose higher fees, leaving the emerging class of managers at a disadvantage?
The Internal Revenue Service (IRS) recently notched a key legal win against hedge funds and asset managers, according to a Wall Street Journal report. The case centers on “carried interest” – the share of fund profits paid to managers.
The IRS victory classifies carried interest as ordinary income subject to higher tax rates, rather than capital gains with preferential rates. This precedent could force managers to pay heightened taxes on performance fees. Industry groups warn it could curb risk-taking and entrepreneurship.
This decision adds operational headaches for fund managers already navigating challenging macro conditions, as it concerns the imposition of self-employment taxes on the bulk of fund manager’s income. This could result in a decrease of 3% in the managers fee structure, so the obvious question is, should this additional tax get passed along to investors through higher management or performance fees? And if so, would it be only the larger, more established fund managers who would have the pricing power to impose higher fees, leaving the emerging class of managers at a disadvantage?
