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I'm at SM. It depends on how the bonus is paid out. It can be paid out as cash and/or an incentive allocation. If cash, then it would be treated as ordinary income. If allocation, then it will be treated as capital gains mostly as short-term capital gains (since the definition of long-term is three years for partnership interest).
Im guessing this is for risk taking senior analysts? What about pms? Do u get short term capital gains treatments on bonuses?
There is almost no difference between STCG and ordinary income. Unless you have offsetting same-year capital losses or carry forwards.
This was for PM. For example, the vast majority of my bonus is in the form of an incentive allocation. I will elect to take some of it in cash, though, for extra liquidity.
The tax rate that I pay on my incentive allocation tends to be slightly lower than the rate for ordinary income because we usually have a decent amount of long-term capital gains. But most HFs churn their books a lot more (we are very low turnover), so I imagine that most if not all of their gains (and thereby you share of gains) will be taxed at ordinary income rates. In addition, when I'm paid an incentive allocation, I also don't pay taxes on the entire amount immediately as I would if I were to take he same amount as a cash bonus. For example, if I were to receive $1mm in cash bonus, I would owe $500k in taxes. If it was an incentive allocation, I will eventually owe $500k, but I might be on the hook for only $300k when taxes are due. So there is a deferred tax element that goes on as well. But, in the end, the rule of thumb is that your incentive allocation will be taxed at short term capital gains unless the tax law changes again. But as long as you are paid an incentive allocation, it does not matter if you are the fund's founder, PM, or analyst.Ut velit ea et odit minima. Voluptatem unde nam explicabo id. Necessitatibus quia magnam dolores expedita quaerat in. Sed velit culpa repellendus adipisci.
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