Carried Interest Tax Question

Hi everyone. For those in PE in the US with fund-level carry with a European waterfall (i.e., the carry doesn't pay out until the entire fund generates an 8% IRR or whatever the fund's hurdle rate is), what happens if there is a quick exit on an investment but the carry for that investment isn't paid out for several years until the fund hits its hurdle rate?

For example, let's say the fund is fully deployed and the first realization is an investment that was held for only two years. Under tax rules, my understanding is that since the investment was held less than three years, it will be taxed as short term capital gains / ordinary income rather than long term capital gains.

However, if the carry wasn't paid out at the time that investment was exited (because it was the first investment in the fund to be realized and the fund hadn't yet hit its hurdle rate), say it takes another three years for the fund to hit its hurdle and start paying out carry, then technically it took five years (two years + three years) for the fund to pay carry on this particular investment. As a result, would the investment be taxed as short term or long term capital gains?

In other words, what is relevant here, (a) the time from when the investment was made to the time it was sold (in which case two years or short term capital gains) or (b) the time from when the investment was made to when carry on the investment was actually paid out (in which case 5 years and potentially long term capital gains treatment)?

I can consult my tax advisor but before doing so and incurring the expense, I figured I would check WSO to see if anyone had run into this before.

Thank you.