May 9, 2021

Volume XI, Number 129

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May 07, 2021

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May 06, 2021

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No S-Corp for You? – New Proposed Carried Interest Regulations that May Affect Crypto Fund Managers

Historically, the ability for investment fund managers to take profits in the form of carried interest has allowed those managers to pay the lower long-term capital gains tax rate (compared to income) so long as the partnership’s or corporation’s underlying investments had been held for greater than a year. The Tax Cuts and Jobs Act, passed in late 2017, extended that period to three years. Due to an ambiguity in the new law, a number of managers – particularly hedge fund managers including,  crypto fund managers ,  changed their structures to that they would be treated as taxable S-corporations or taxable passive foreign investment companies (PFICs) that had made certain elections on their tax returns.

Arguably, this change could have resulted in these managers to be able to use the old one-year holding period providing long-term capital gains treatment.

New proposed IRS regulations would make it clear that assets, such as cryptocurrency and security tokens, must be held for three years before an individual or pass-through carried interest recipient could get long-term capital gains treatment regardless of the technical structure of the carry recipient

Among many other things, the proposal should be considered as a warning against a fund manager attempting allocation waivers or other methods reallocating gains or losses so that they are first allocated to non-carry partners if the carry partner cannot get long-term capital gains treatment.  If finalized, this would effectively nullify a number of managers’ attempts to move offshore or create S-corps to avoid revised treatment under the new law.  A more detailed alert here.

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© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 238
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About this Author

Daniel L. McAvoy Shareholder Investment Funds Securities & Corporate Finance Mergers, Acquisitions and Divestitures Corporate and Transactional Joint Ventures and Strategic Alliances
Shareholder

Dan McAvoy focuses his practice on private closed-end investment funds, corporate finance and M&A with a focus on private investment fund transactions, including complex GP-led restructurings and secondary transactions. Dan is a trusted adviser to numerous investment advisers, fund sponsors and investors, and has represented a range of companies, from startups to Fortune 500 companies. Dan has also represented portfolio companies and sponsors through all parts of the corporate life cycle, including formation, venture financings, add-ons, stock sales, asset sales, private and...

212-413-2844
Stephen A. Rutenberg Shareholder Polsinelli New York Bankruptcy and Financial Restructuring Bankruptcy Litigation Capital Markets ,Commercial Lending ,Debt and Claims Trading, Financial Services, Insolvency, Financial Technology FinTech and Regulation
Shareholder

Stephen Rutenberg’s practice focuses on the intersection of special situations investing and FinTech including cryptocurrency and blockchain technology. 

A significant component of Stephen’s practice relates to his work in the distressed debt market, representing clients in the purchase and sale of loans and securities of distressed and bankrupt companies. Recent representations include advising on the purchase, sale and financing of bankruptcy trade claims in several major chapter 11 cases, including Lehman Brothers, and the MF Global and Icelandic bank liquidations. He works with...

212.413.2843
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