Carried Interest
A fund manager's share of the profits — and a distinctive tax and reporting profile for those who hold it.
Carry is the performance share (often ~20%) that a fund's general partners receive, frequently taxed at capital-gains rates subject to a holding-period rule. If you hold carry, your economics and K-1s look nothing like a passive LP's, and the timing of recognition is lumpy. It's one more income stream that a single-tax-return tool simply isn't built to model.
The manager's share of the profits
Carried interest — “carry” — is the performance share that a fund's general partners receive, classically around 20% of profits above a return hurdle. It's the upside that compensates fund managers for performance rather than just the management fee, and it can be the bulk of a successful GP's economics. If you hold carry, your stake in a fund looks nothing like a passive limited partner's.
A distinctive tax and reporting profile
Carry is often taxed at long-term capital-gains rates, but a holding-period rule generally requires the underlying assets be held more than three years for the gain to qualify as long-term — otherwise it's short-term. Recognition is lumpy, tied to when the fund realizes gains, and your K-1 reflects an allocation that's economically very different from an LP's. It's an income stream a single-tax-return tool simply isn't built to model.
How Formation handles it
Formation tracks carry-bearing interests as their own entity-level positions, so the distinctive timing and K-1 treatment are visible alongside the rest of your wealth rather than flattened into a generic “fund” line. The tax planning around recognition stays with your CPA; Formation keeps the economics legible.
A worked example
As a GP, you hold 20% carry in a fund that realizes a $10 million gain on an asset held four years. Your $2 million carry can qualify for long-term capital-gains treatment because the three-year holding period was met — but if the asset had been sold at two years, that same carry would be taxed as short-term.
Frequently asked
How is carried interest taxed?
Generally at long-term capital-gains rates when the underlying assets meet the required holding period, otherwise at short-term rates. The character flows through on a K-1, and timing depends on when the fund realizes its gains.
What is the three-year holding period for carried interest?
For carry to qualify for long-term capital-gains treatment, the assets generating the gain generally must be held more than three years — longer than the usual one-year rule for most investments. Gains on assets held shorter are treated as short-term.
In Formation
Private-fund & carry tracking
Related terms
See this in your own numbers.
Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.
Get started