The Taxation of Carried Interests in Private Equity

61 Pages Posted: 10 Oct 2007

See all articles by David A. Weisbach

David A. Weisbach

University of Chicago - Law School; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)


This essay analyzes the tax treatment of carried interests in private equity. It argues that there are two competing analogies: service income and investment income. Standard approaches are not able to resolve which of the competing analogies is better and often fail even to recognize that there are competing analogies. The best method for determining the proper treatment of carried interests is through direct examination of the effects of each of the possible treatments, known as the theory of line drawing in the tax law. From this approach, it is clear that the better treatment of holders of carried interests is as investors. Key pieces of evidence include the longstanding policy premises behind partnership taxation and the complexity and avoidance problems with attempts to tax carried interests as service income. Send comments.

Keywords: tax law, service income, investment income

Suggested Citation

Weisbach, David, The Taxation of Carried Interests in Private Equity. Virginia Law Review, 2007; U of Chicago Law & Economics, Olin Working Paper No. 365. Available at SSRN:

David Weisbach (Contact Author)

University of Chicago - Law School ( email )

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Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

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