Before 2017, if a taxpayer received a “carried interest” in a partnership and held that interest for at least one year, the taxpayer would generally receive long-term capital gain treatment on a sale or redemption of such interest. In 2017, Congress enacted P.L. 115-97, which added new Section 1061 to the Internal Revenue Code. Section 1061 generally imposes a three-year holding period requirement in order for any capital gains with respect to carried interests to be treated as long-term capital gains.

On July 31, 2020, Treasury released proposed regulations under Section 1061, and on January 7, 2021, Treasury finalized these regulations. The final regulations largely adopt the proposed regulations, but with some important modifications that are largely favorable to taxpayers.