Carried Interest After-Tax Calculator

IRC § 1061 (TCJA 2017) imposes a 3-year holding period for long-term capital gain treatment on carried interest. Miss the threshold and $5M of carry costs you an extra $850,000 in federal taxes alone. Enter your scenario to see both paths side by side.

What's at stake: federal tax only (40.8% vs 23.8%)

Before your state. Top-bracket federal rates: ordinary income 37% + 3.8% NIIT = 40.8%; long-term capital gain 20% + 3.8% NIIT = 23.8%. Source: IRS Rev. Proc. 2025-32.³

California adds 13.3% to both paths — state tax is the same regardless of hold period. Use the calculator above to model your state.

How IRC § 1061 works

Before TCJA (2017), a 1-year hold was enough for PE carry to qualify as long-term capital gain. Section 1061 extended the required hold to 3 years for "applicable partnership interests" — defined as any interest in a partnership held in connection with providing investment management or advisory services.¹

The IRS issued final regulations in January 2021 (T.D. 9945) filling in the mechanics: the 3-year test is applied per asset at the fund level, using the fund's holding period of each portfolio company — but your 3-year clock also runs from your grant date, and both conditions must be satisfied.²

Five mechanics PE professionals get wrong

• The clock starts at grant date, not fund vintage. Rev. Proc. 93-27 establishes that a profits interest (carry) is granted when the partnership interest is received.⁴ If you joined a fund in year 3 and the fund sells a portfolio company in year 4, your hold is 1 year — not the fund's 4 years. You take the ordinary rate on that sale even if the fund has held the asset for 4 years.
• Per-asset, not per-fund. Each portfolio company exit is tested independently. A fund can have some distributions that qualify as LTCG (assets sold after your 3-year anniversary) and some that don't (assets sold before). Don't assume a fund with a 5-year average hold means all carry qualifies.
• Capital interests are exempt. Direct co-investments structured as a capital interest — not carry — retain the 1-year LTCG rule. This is a meaningful planning lever for funds with co-invest programs. The capital interest vs. carry distinction depends on structuring at the time of the investment.
• State taxes don't change paths. California, New York, and New Jersey tax carried interest at ordinary income rates regardless of the federal holding period. There is no state-level § 1061 benefit. The only state planning lever is residency — being a Texas or Florida resident at the time of distribution.
• The 3-year rule survived OBBBA. The One Big Beautiful Bill Act (July 2025) made many tax changes but did not modify § 1061. The 3-year holding period requirement remains in effect for 2026 and beyond.

Five planning levers worth modeling

1. Hold-period tracking by deal. Know your grant date and track each portfolio company's exit timeline relative to it. The GP can often time a secondary sale, dividend recap, or distribution to clear the 3-year date. A difference of 30–90 days can mean hundreds of thousands of dollars on a large carry allocation.
2. Co-invest structuring. If your fund offers co-invest rights alongside carry, structure the co-invest as a capital interest at the time of the investment. Capital interests aren't "applicable partnership interests" under § 1061 — they get 1-year LTCG. On a $1M co-invest that exits 2 years in, the difference vs carry treatment is meaningful.
3. State residency at distribution. If you live in California or New York when carry distributes, you pay state ordinary income rates (13.3% or 9.65–13.5%) on top of federal regardless of hold period. The residency question — and the mechanics of actually changing domicile under CA FTB Pub. 1100 or NY's 183-day rule — is often the highest-dollar planning opportunity available.
4. QSBS stacking on portfolio company equity. Carry is not QSBS-eligible. But direct equity in a portfolio company C-corp — acquired through co-invest or management equity — may qualify under IRC § 1202 for up to $15M per issuer tax-free under post-OBBBA rules (stock acquired after July 4, 2025). The assets can be structured so you hold both carry (§ 1061 treatment) and QSBS equity (§ 1202 exclusion) in the same deal.
5. Charitable giving in distribution years. A large carry year is also a high-deduction year. Pre-distributing appreciated securities into a donor-advised fund (DAF) in the same tax year offsets income — subject to the OBBBA 2026 rules: 0.5% AGI floor and 35% value cap. A specialist runs the carry amount against your charitable capacity before the K-1 closes.

Sources

1. IRC § 1061 — Applicable Partnership Interests (TCJA 2017, P.L. 115-97): law.cornell.edu/uscode/text/26/1061
2. IRS T.D. 9945 (Jan. 19, 2021) — Final Regulations under § 1061, per-asset holding period rules: irs.gov/pub/irs-drop/td-9945.pdf
3. IRS Rev. Proc. 2025-32 — 2026 inflation-adjusted tax parameters (ordinary brackets, LTCG thresholds, NIIT): irs.gov/pub/irs-drop/rp-25-32.pdf
4. Rev. Proc. 93-27 — Profits interest grant date and non-taxable treatment at grant: irs.gov/irb/1993-24_IRB#RP-93-27

Tax values verified as of June 2026. Rates assume top federal bracket (37% ordinary / 20% LTCG) plus 3.8% NIIT. Actual rates depend on total income; use the inputs above to model your specific rates. Content is for informational purposes only and does not constitute tax or financial advice.