Why VC Income is not Capital Gains

Because the NY Times doesn’t do detail anymore, I haven’t had a chance yet to learn what all the financial reform bill would entail.  There had been some talk about reforming the tax code so that carried interest, the income of principals in hedge funds and venture capital groups, would be taxed as income and not capital gains.  While my first reaction is that carried interest is capital gains and should be taxed as such, it is also apparent that carried interest is the primary source of income for these managers.  James Kwak, who as an entrepreneur benefited from venture capital, makes a much stronger case that the twenty percent fee managers earn is just that.  His refutation gets a bit technical, but the basic idea is that the return on owners’ equity in a VC fund is definitely capital gains, but the 20% represents a management fee, just like the 2%, paid by the other fund principals if gains are realized.