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IRC §1061

Last updated

Quick Answer

Section 1061 requires a three-year holding period, rather than one year, for carried interest gains to receive long-term capital gain treatment.1,2

What it is

Enacted by the 2017 tax legislation, it applies to applicable partnership interests held in connection with the performance of substantial services. Gain on assets held three years or less that would otherwise be long-term is recharacterized as short-term and taxed at ordinary rates. The final regulations apply to taxable years beginning on or after 19 January 2021.1,2

Operational context

What good looks like

Why It Matters

The three-year period attaches to the gain rather than to the interest: an asset held for less produces short-term treatment even where the partnership interest itself is long-standing. Section 1061 recharacterizes gain; it does not deny long-term treatment outright.1

Frequently Asked Questions

What is IRC §1061 in venture capital?

Enacted by the 2017 tax legislation, it applies to applicable partnership interests held in connection with the performance of substantial services. Gain on assets held three years or less that would otherwise be long-term is recharacterized as short-term and taxed at ordinary rates.

Why is IRC §1061 important for startups?

Understanding IRC §1061 is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.

Sources & References

  1. 1.irc-1061 — 26 U.S.C. §1061 — Partnership interests held in connection with performance of services26 U.S.C. §1061 — Partnership interests held in connection with performance of servicesCornell LII(Section 1061 requires a three-year holding period, rather than one year, for carried interest gains to receive long-term capital gain treatment.)primary · T1 · carry-tax · term
  2. 2.irc-1061-olrc — 26 U.S.C. §1061 (preliminary edition)26 U.S.C. §1061 (preliminary edition)Office of the Law Revision Counsel(Section 1061 requires a three-year holding period, rather than one year, for carried interest gains to receive long-term capital gain treatment.)primary · T1 · carry-tax · term
  3. 3.irs-1061-faqs — Section 1061 Reporting Guidance FAQsSection 1061 Reporting Guidance FAQsIRS(Section 1061 requires a three-year holding period, rather than one year, for carried interest gains to receive long-term capital gain treatment.)primary · T1 · carry-tax · term
  4. 4.irs-pub-541 — Publication 541, *Partnerships* (rev. Dec. 2025)Publication 541, *Partnerships* (rev. Dec. 2025)IRS(Section 1061 requires a three-year holding period, rather than one year, for carried interest gains to receive long-term capital gain treatment.)primary · T1 · carry-tax · term
  5. 5.crs-carried-interest — CRS Report R46447, *Taxation of Carried Interest* (Marples, upd. Aug. 4, 2022)CRS Report R46447, *Taxation of Carried Interest* (Marples, upd. Aug. 4, 2022)Congressional Research Service(Section 1061 requires a three-year holding period, rather than one year, for carried interest gains to receive long-term capital gain treatment.)primary · T1 · carry-tax · term

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