Carried interest
InvestingDefinition
The share of a private investment fund's profits paid to its general partners (the people who run it), separate from their management fee. Standard structure is "2 and 20" — 2% annual management fee plus 20% of profits above a hurdle rate. Carried interest is currently taxed as long-term capital gains (15-20%) rather than ordinary income, a controversial tax loophole that survives every reform attempt.
Example
A $1B private equity fund returns $2B over 10 years. Profits = $1B. After an 8% hurdle, the GP gets 20% of $400M = $80M as carried interest, taxed at the 20% capital gains rate rather than the ~37% ordinary income rate. Tax savings: ~$14M.