US hedge funds face draconian tax proposals

Hedge Funds Review – US hedge fund managers could be subject to higher personal taxes if changes to the taxation rules included in President Barack Obama’s 2010 budget proposal are adopted.

The budget proposal includes measures to treat carried interest as ordinary income as opposed to capital gains for tax purposes. That would raise taxes on income earned from performance and incentive fees from the current rate of 15% applicable to capital gains to over 39%.

Carried interest has been a sensitive topic in Washington for many years. Some politicians have argued that hedge funds and private equity groups have used the carried interest exemption to avoid paying their fair share of taxes.

The proposed change in tax rules could have a deep impact on the earnings of hedge fund managers. The compensation structure at many hedge fund companies puts the onus on performance and incentive fees as the principal source of income for the manager.

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