Carried interest is a share of profits from a private equity, venture capital, or hedge fund paid as incentive compensation to the fund’s general partner.

Carried interest typically is only paid if a fund achieves a specified minimum return.

In most cases, carried interest is considered a return on investment and taxed as a capital gain rather than ordinary income, usually at a lower rate.

Because carried interest is typically distributed after a period of years, it defers taxes in the manner of an unrealized capital gains.

Carried interest on investments held longer than three years is subject to a long-term capital gains tax with a top rate of 20%, compared with the 37% top rate on ordinary income.

Critics argue taxing carried interest as long-term capital gains allows some of the richest Americans to unfairly defer and lower taxes on the bulk of their income.

Defenders of the status quo contend the tax code’s treatment of carried interest is comparable to its handling of “sweat equity” business investments.

Source:  https://www.investopedia.com/terms/c/carriedinterest.asp