Most significantly, the Final Regulations addressed comments on, and made important revisions to, three key aspects of the rules: When it applies, IRC Section 1061 recharacterizes gains from the sale of capital assets held for one to three years, otherwise eligible for taxation at LTCG rates, as short-term capital gains ( STCG), typically taxed at the rates applicable to ordinary income. This requirement applies to carried interests in many private equity ( PE) funds, hedge funds and other alternative asset management funds. IRC Section 1061, enacted by the Tax Cuts and Jobs Act of 2017, generally requires certain carried interest arrangements to be held for more than three years for the related capital gains to qualify for tax-favored long-term capital gain ( LTCG) treatment. The Final Regulations generally follow the approach taken by proposed regulations published on Aug(the Proposed Regulations), 2 with several notable exceptions. On January 19, 2021, the IRS published final carried interest regulations under IRC Section 1 1061, as well as related partnership and holding period provisions (the Final Regulations).
Final IRC Section 1061 carried interest regulations have implications for passthrough entities, including private equity and alternative funds, and their professionals
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