How does Section 1061 tax carried interest?
Section 1061 targets “carried interest” — a partnership interest held in connection with performing services, common in private equity and hedge funds. For these interests, long-term capital gain is measured against a three-year holding period instead of the usual one year, so gain on assets held three years or less is recharacterized as short-term.
The answer
The rule
26 U.S.C. § 1061(a) applies when a taxpayer holds one or more applicable partnership interests during the year. It computes the excess of the taxpayer’s net long-term capital gain on those interests over the gain that results from applying the capital-gain rules of section 1222 by substituting “3 years” for “1 year.” That excess is treated as short-term capital gain.
Why it matters
Long-term capital gain is taxed at lower rates than short-term gain. By lengthening the holding period to three years for carried interests, Section 1061 moves more of a fund manager’s gain into the higher short-term bracket unless the underlying assets are held longer.
The judged input
What the AI drafted
Submitted to the judgeThis is the kind of answer a cloud legal AI returns for the question above. Kingsfield does not write it — it rules on the citations the model put in it. This draft cites two authorities; one of them is wrong.
The judge ruled on every citation as the draft used it — it accepted 26 U.S.C. § 1061(a) and rejected 26 U.S.C. § 1222. Here is why.
The verdict
How Kingsfield ruled
Ruled 2026-06-23Each citation in the draft above was submitted to the Kingsfield judge and ruled against the primary-law corpus — Accept, Reject, or Inconclusive, per citation. These are live verdicts, not editorial. Each card shows the claim the draft made and the verbatim authority the verdict was rendered against.
The draft claimed: For a taxpayer who holds one or more applicable partnership interests during the taxable year, section 1061(a) computes the excess of the taxpayer's net long-term capital gain with respect to those interests over the amount that would result from applying a three-year holding period.
“§ 1061 Partnership interests held in connection with performance of services. (a) If one or more applicable partnership interests are held by a taxpayer at any time during the taxable year, the excess (if any) of— (1) the taxpayer’s net long-term capital gain with respect to such interests…, over (2) the taxpayer’s net long-term capital gain… computed by applying paragraphs (3) and (4) of section 1222 by substituting “3 years” for “1 year”…”
Cite found; proposition supported by the cited text.
The draft claimed: Section 1222 imposes the three-year holding period that applies to carried interests held in connection with the performance of services.
Cite found, but the cited text does not support the proposition. 26 U.S.C. 1222 is the general definitional section for short-term and long-term capital gains and losses, drawing the ordinary one-year line; the carried-interest three-year rule is at 26 U.S.C. 1061. Regenerate with the correct authority.
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Connect the Judge See the architectureThis page is legal information, not legal advice, and does not create an attorney-client relationship. The draft shown is an illustration of a typical AI answer; verdicts reflect the cited authority in the Kingsfield corpus as of the ruling date shown above.