2017 Essential Tax and Wealth Planning Guide
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Tax implications of fund investing
What is an investment fund?
.
Introduction
What is an investment fund?
Types of investment
funds and income tax
characteristics
• Marketable securities
Hedge funds
• Private equity/venture capital
Publicly traded partnerships
Real estate funds
.
Fund of funds
Investment fund attributes
• Trader versus investor
entities
Passive versus
non-passive income
Separately stated activity
(including PTPs)
Qualified small business
stock (QSBS)
Unrelated business
taxable income
• State tax reporting
Conclusion
.
Resources
The popularity of funds
continues to grow, and
as of December 31, 2015,
it was estimated that
$3.65 trillion was invested
globally into private equity
and $2.8 trillion² was
invested into hedge funds.
Investment funds are types of investment
companies that are typically organized
as partnerships. An investment company
invests the money it receives from investors
on a collective basis, and each investor
generally shares in the profits and losses
in proportion to the investor's interest in
the investment company. The performance
of the investment company will be based
on (but it will not be identical to) the
performance of the securities and other
assets that the investment company owns.
The focus of this summary is on investment
companies organized as partnerships,
which are typically described as investment
funds. These investment funds are typically
structured as partnerships for tax purposes,
either as limited partnerships (LPs) or
limited liability companies (LLCs). The
partnership tax structure is typically used by
investment funds, rather than a corporate
investment vehicle, to allow for the
investment fund's income to be taxed at the
investor level and provide for flow-through
treatment of income, expense, gains, and
losses. Although mutual funds are a type
of investment company, they are typically
organized as corporations and will not be
addressed in this summary.
Investors in investment funds include
pension funds, sovereign wealth funds,
endowment plans, family offices, high-
net worth individuals, foundations, and
insurance companies. Funds may be
referred to as alternative investments and
commonly include marketable security
funds, hedge funds, private equity funds,
and real estate funds. The popularity
of funds continues to grow, and as of
December 31, 2015, it was estimated
that $3.65 trillion' was invested globally
into private equity and $2.8 trillion² was
invested into hedge funds. A more detailed
discussion on the different types of funds
available for investment follows.
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By Deloitte estimate, based on prorating the $3.5T figure from
Preqin data as of June 2015, forward to December 2015. © 2016
Preqin Ltd. www.preqin.com. Note: Venture capital data are excluded
from this number.
2 BarclayHedge Ltd. Data as of December 2015, www.barclayhedge.com.
2017 Essential Tax and Wealth Planning Guide | Tax implications of fund investing
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