Just out of curiousity,how are profits for investors in a hedge fund taxed?The fund could have a mix of investments and holding periods,such as tax exempt munis and taxable corporate bonds,dividends,long term capital gains(maximum of 15% tax rate),and short term capital gains.Does this make tax preparation difficult because of all these varying tax rates?
Hedge funds are typically pass-through entities (LP's and LLC's) where the realized capital gains/losses, interest income, and expenses are divided among all the investors each year. They are reported to the investors on a K-1.
So does the k-1 form differentiate between long term and short term capital gains allowing the investor the favorable 15% maximum tax rate treatment for long term capital gains or are all the profits taxed at ordinary income tax rates?
It's obvious to see the answer is "yes" just by glancing at a K-1 form. You are invited to try to figure the easy things out yourself. Type "k-1" into the box at www.irs.gov to see a K-1.