While I consider myself to be a fairly conservative tax practicioner, I have always thought that the "carried interest" provision(and it is nowhere in the Internal Revenue Coide itself) was an incorrect interpretation of the law and should be changed. It essentially gives the investment bankers and hedge fund operators who use it a best of both worlds option. If their investment fails to pay off, they take an ordinary business loss. If it is successful, they treat it as capital income without having ever paid income tax on the receipt of the original provision of the stock to them. My solution would be to give them a choice. If they treat their initial receipt of the income as income, when it liquidates it can be either capital gain or loss, as the case may be. If they choose not to take the oriiginal provision of the interest in the entity to them as income when received , then when they "cash out" it should all be ordinary income to them. Thus it works much like an IRA in that the character ofthe future income is determined by the treatment of the contribution at the time it was made.