Do US-based hedge fund managers pay ordinary income tax rates on the fees they earn, or do they pay the lower capital gain rates? Just curious as recent news paints them to be paying lower taxes than the rest of us.
I would guess that taxes on fees has to be at the ordinary income rate. I suspect many of them also invest in their funds, which is why a significant portion of there earnings are taxed at the capital gains rate.
the fees are paid to the fund. The manager is just an ordinary employee of the fund, just like the janitor and the secretary and all their income is what we call w-2 ordinary income and taxed as such. But a successful fund manager will usually have a lot of their own money in the fund, and they will pay the same tax rate that any investor in the fund pays. And most of that tax liability will be at the lower cap gains rate.
It's not a simple answer. Depends on the fund's corporate structure, what they invest in, where they are based...lots of variables there. The media - and a few candidates - have gotten wrapped around the axle over carried interest. It sounds great to the voters to get up there and complain about "the fat cats on Wall St not paying their fair share".
Ya, I think it depends on their structure. Many are based offshore (Cayman Islands), however if the manager of the fund is based in the U.S. then he pays U.S. tax rates. I think the loophole is regarding the carried interest portion of the fund. The manager gets the 2% of AUM (which is taxed at ordinary income), yet the performance fees are considered "carried interest" and therefore taxed at the more favorable capital gains rate. I'm sure the guys who set up these funds are well versed in the structure and how it works most favorably to the fund and its managers/owners.