---
kind: "section"
citation: "26 U.S.C. § 1061"
title: "26"
title_heading: "Internal Revenue Code"
number: "1061"
heading: "Partnership interests held in connection with performance of services"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/1061"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter O — Gain or Loss on Disposition of Property"
  - "Part IV — Special Rules"
---

# §1061. Partnership interests held in connection with performance of services

- (a) **In general—** If one or more applicable [partnership](/usc/26/761.md?p=a) [interests](/usc/26/856.md?p=f-1) are held by a [taxpayer](/usc/26/1313.md?p=b) at any time during the taxable year, the excess (if any) of—
  - (1) the [taxpayer](/usc/26/1313.md?p=b)’s net long-term capital gain with respect to such [interests](/usc/26/856.md?p=f-1) for such taxable year, over
  - (2) the [taxpayer](/usc/26/1313.md?p=b)’s net long-term capital gain with respect to such [interests](/usc/26/856.md?p=f-1) for such taxable year computed by applying paragraphs (3) and (4) of sections[^1] 1222 by substituting “3 years” for “1 year”,

  shall be treated as short-term capital gain, notwithstanding [section 83](/usc/26/83.md) or any election in effect under [section 83(b)](/usc/26/83.md?p=b).

- (b) **Special rule—** To the extent provided by the Secretary, [subsection (a)](#a) shall not apply to income or gain attributable to any asset not held for portfolio investment on behalf of third party investors.
- (c) **Applicable partnership interest—** For purposes of this section—
  - (1) **In general—** Except as provided in this paragraph or [paragraph (4)](#c-4), the term “applicable [partnership](/usc/26/761.md?p=a) [interest](/usc/26/856.md?p=f-1)” means any [interest](/usc/26/856.md?p=f-1) in a [partnership](/usc/26/761.md?p=a) which, directly or [indirectly](/usc/26/101.md?p=a-3-B), is transferred to (or is held by) the [taxpayer](/usc/26/1313.md?p=b) in connection with the performance of substantial services by the [taxpayer](/usc/26/1313.md?p=b), or any other [related person](/usc/26/864.md?p=d-4), in any applicable [trade or business](/usc/26/1402.md?p=c). The previous sentence shall not apply to an [interest](/usc/26/856.md?p=f-1) held by a person who is employed by another entity that is conducting a [trade or business](/usc/26/1402.md?p=c) (other than an applicable [trade or business](/usc/26/1402.md?p=c)) and only provides services to such other entity.
  - (2) **Applicable trade or business—** The term “applicable [trade or business](/usc/26/1402.md?p=c)” means any activity conducted on a regular, continuous, and substantial basis which, regardless of whether the activity is conducted in one or more entities, consists, in whole or in part, of—
    - (A) raising or returning capital, and
    - (B) either—
      - (i) investing in (or disposing of) specified assets (or identifying specified assets for such investing or [disposition](/usc/26/424.md?p=c-1)), or
      - (ii) developing specified assets.
  - (3) **Specified asset—** The term “specified asset” means [securities](/usc/26/368.md?p=a-2-F-vii) (as defined in [section 475(c)(2)](/usc/26/475.md?p=c-2) without regard to the last sentence thereof), commodities (as defined in [section 475(e)(2)](/usc/26/475.md?p=e-2)), real [estate](/usc/26/1361.md?p=c-3) held for rental or investment, [cash](/usc/26/856.md?p=c-5-K) or [cash](/usc/26/856.md?p=c-5-K) equivalents, options or derivative [contracts](/usc/26/101.md?p=f-3-A) with respect to any of the foregoing, and an [interest](/usc/26/856.md?p=f-1) in a [partnership](/usc/26/761.md?p=a) to the extent of the [partnership](/usc/26/761.md?p=a)’s proportionate [interest](/usc/26/856.md?p=f-1) in any of the foregoing.
  - (4) **Exceptions—** The term “applicable [partnership](/usc/26/761.md?p=a) [interest](/usc/26/856.md?p=f-1)” shall not include—
    - (A) any [interest](/usc/26/856.md?p=f-1) in a [partnership](/usc/26/761.md?p=a) directly or [indirectly](/usc/26/101.md?p=a-3-B) held by a corporation, or
    - (B) any capital [interest](/usc/26/856.md?p=f-1) in the [partnership](/usc/26/761.md?p=a) which provides the [taxpayer](/usc/26/1313.md?p=b) with a right to share in [partnership](/usc/26/761.md?p=a) capital commensurate with—
      - (i) the amount of capital contributed (determined at the time of receipt of such [partnership](/usc/26/761.md?p=a) [interest](/usc/26/856.md?p=f-1)), or
      - (ii) the [value](/usc/26/851.md?p=c-4) of such [interest](/usc/26/856.md?p=f-1) subject to tax under [section 83](/usc/26/83.md) upon the receipt or vesting of such [interest](/usc/26/856.md?p=f-1).
  - (5) **Third party investor—** The term “third party investor” means a person who—
    - (A) holds an [interest](/usc/26/856.md?p=f-1) in the [partnership](/usc/26/761.md?p=a) which does not constitute [property](/usc/26/317.md?p=a) held in connection with an applicable [trade or business](/usc/26/1402.md?p=c); and
    - (B) is not (and has not been) actively engaged, and is (and was) not related to a person so engaged, in (directly or [indirectly](/usc/26/101.md?p=a-3-B)) providing substantial services described in [paragraph (1)](#c-1) for such [partnership](/usc/26/761.md?p=a) or any applicable [trade or business](/usc/26/1402.md?p=c).
- (d) **Transfer of applicable partnership interest to related person—**
  - (1) **In general—** If a [taxpayer](/usc/26/1313.md?p=b) transfers any applicable [partnership](/usc/26/761.md?p=a) [interest](/usc/26/856.md?p=f-1), directly or [indirectly](/usc/26/101.md?p=a-3-B), to a person related to the [taxpayer](/usc/26/1313.md?p=b), the [taxpayer](/usc/26/1313.md?p=b) shall include in gross income (as short term capital gain) the excess (if any) of—
    - (A) so much of the [taxpayer](/usc/26/1313.md?p=b)’s long-term capital gains with respect to such [interest](/usc/26/856.md?p=f-1) for such taxable year attributable to the [sale or exchange](/usc/26/864.md?p=c-8-D) of any asset held for not more than 3 years as is allocable to such [interest](/usc/26/856.md?p=f-1), over
    - (B) any amount treated as short term capital gain under [subsection (a)](#a) with respect to the transfer of such [interest](/usc/26/856.md?p=f-1).
  - (2) **Related person—** For purposes of this paragraph, a person is related to the [taxpayer](/usc/26/1313.md?p=b) if—
    - (A) the person is a member of the [taxpayer](/usc/26/1313.md?p=b)’s family within the meaning of [section 318(a)(1)](/usc/26/318.md?p=a-1), or
    - (B) the person performed a service within the current calendar year or the preceding three calendar years in any applicable [trade or business](/usc/26/1402.md?p=c) in which or for which the [taxpayer](/usc/26/1313.md?p=b) performed a service.
- (e) **Reporting—** The Secretary shall require such reporting (at the time and in the manner prescribed by the Secretary) as is necessary to carry out the purposes of this section.
- (f) **Regulations—** The Secretary shall issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section[^2]

## Footnotes

[^1]: So in original. Probably should be “section”.
[^2]: So in original. Probably should be followed by a period.

## Source credit

(Added Pub. L. 115–97, title I, § 13309(a)(2), Dec. 22, 2017, 131 Stat. 2130.)

## Notes

### Editorial Notes

### Prior Provisions

A prior section 1061 was renumbered section 1063 of this title.

### Statutory Notes and Related Subsidiaries

### Effective Date

Pub. L. 115–97, title I, § 13309(c), Dec. 22, 2017, 131 Stat. 2131, provided that: “The amendments made by this section [enacting this section and renumbering former section 1061 of this title as section 1062] shall apply to taxable years beginning after December 31, 2017.”