Tim,

I do not think this is correct, at least in the US. See this.

If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—
(1) the fair market value of such property …. over
(2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services…

I’ve skipped a lot of business about restrictions nd transferability, etc.

As a practical matter the kind of transaction you are talking about often occurs when the company is organized, and the value of the equity is usually small, so there may be little practical effect. But the idea that you can dodge the tax by changing the time at which the grant is made does not seem correct to me.

A different case occurs, I think, when the equity is, in effect, given in exchange not for management services but for the contribution of an asset, often a piece of intellectual property, which forms a part of the business.

The short version is that high-priced lawyers and lobbyists are really good at putting “income” into whatever category is least taxed, however the tax code is constructed. And, moreover, off-share havens beckon.

If he gets it by grant of share options, yes. But if, as is entirely normal, the entrepreneur sets up the deal at the beginning along the lines of “Yes, I know I’m only putting in £500 but I’ll also be managing it for the next 3 years so I get 40% of the equity” then that appears to me to be very much the same as carried interest. And currently, no, it’s not taxed as income.

A glimpse into the over-arching modus operandi of this administration? Hmmmm.

Yes, but if the entrepreneur is rewarded with equity for his services in running the business that equity is in fact considered as ordinary income at the time received. Capital gains treatment is only available when the business is sold. At that time the entrepreneur has already paid (or should have paid) ordinary income tax on the value of the equity at the time he received it. The capital gain comes when the equity is sold at a higher price.

Fair enough but what does that have to do with carried interest?

The higher up the ladder you go….the less effort it takes to pull you down. Professionally. And when you spend years and years and years of post grad, or post doc work, and money, you have a real vested interest to protect.

It works almost every time.

But that is method-of-payment for fees they earn. If they pay taxes on it and then invest for more than a year they can get capital gains treatment, but how do they get it when they first earn the payment. Compensation in equities doesn’t get you capital gains treatment—see executive stock options which are treated as ordinary income when exercised.

My favorite part is that the managers do not share in the losses of the fund, only in the profits.