§1061 Partnership Interests Held in Connection with Performance of Services

Summary

Treats some partnership interests you get for doing important work as if the gain were short-term for tax purposes. If you hold one of those interests at any time in the year, any amount of your reported long-term gain from that interest that is larger than what would be called long-term if “long-term” required holding assets for 3 years instead of 1 year must be treated as short-term. That rule applies even if you used other tax rules or elections that might normally make the interest long-term. An “applicable partnership interest” is one you get or hold because you performed substantial services in a business that raises or returns money and that invests in or develops certain assets. Those assets include securities, commodities, rental or investment real estate, cash or cash equivalents, options or derivatives tied to those things, and partnership interests to the extent they reflect those assets. The rule does not apply to interests held by a corporation or to simple capital interests that just match what you invested or were taxed on when received. If you transfer such an interest to a related person (family as defined by tax law, or someone who worked in the same business in the current or past 3 calendar years), extra amounts of gain tied to assets held 3 years or less must be included as short-term. The Treasury can issue rules, require reporting, and exclude income tied to assets not held for third-party investors’ portfolios.