Even worse, hedge fund managers somehow get their income classified as "capital gains" and only pay the 15% rate on their earned income, even though they never had any cash equity at risk. It is a massive subsidy to the industry and it is grossly unfair to other taxpaying Americans.
I have similar sweat equity in my tech company, and have to pay income tax rates and payroll taxes on my earnings.
And when there was some noise a couple years ago about changing that tax loophole the idea was immediately squashed by congress and it died a quiet death. Almost as if congress does Wall Street's bidding to the detriment of the overall national interest. Almost.
That "loophole" you're talking about is known as carried interest. Carried interest exists for a good reason (at least to my understanding); so that partners can with less capital can build sweat equity. Sure there are people who take advantage of it, but it does serve a purpose (taxes more so than retaining their profits). I'm not saying there aren't plenty of greedy hedge fund managers, but understanding why it exists will at least help form a solid opinion.
>The arguments for the carried interest are fairly compelling: without it, the partners who contributed ideas and talent end up being taxed much more heavily on their earnings than partners who contributed financial assets. This is not only sort of unfair, and impedes the ability of talented people with few financial resources to move into the moneyed class, but also might have implications for economic growth: if your gains are going to be taxed at ordinary income rates, why quit that safe job and risk all on an untried venture?
Consider reinvesting a portion of the profits from your tech company and later selling equity at long-term capital gains rates. (n.b. This advice is isomorphic under any possible opinion regarding hedge funds if one's goal is to minimize taxes.)
I have similar sweat equity in my tech company, and have to pay income tax rates and payroll taxes on my earnings.
No, you have to pay income tax rates and payroll taxes on your salary. Sweat equity is taxed at capital gains rates, much like the sweat equity of hedge fund managers.
(Except for the various special cases when it is not. I've only gotten equity at the stage of founding the company, I'm told it's taxed differently if you get it as part of your comp package when you work at google.)
I have similar sweat equity in my tech company, and have to pay income tax rates and payroll taxes on my earnings.